Private ruling: Rental property expenses
Published: September 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Question and answer | Are you entitled to claim deductions for the expenses you incurred in relation to you your rental property? | Yes.

Relevant facts and circumstances: You own a rental property. It consists of several units. ATO records show that it was first made available for rent several years ago. A routine rental property inspection was made by the real estate agent. This report revealed that the two bathrooms in a (ensuite & general bathroom) were in terrible condition. There was considerable water damage: timber rot, loose tiles and unstable flooring; all due to leaking showers. Water was also leaking downstairs into the hallway. A repairer was sent immediately to inspect the dwelling and provide a quote for repairing this damage. They provided a quote The repairs were carried. Once work commenced additional issues were uncovered, such as hidden rotten woodwork which caused unstable flooring. The actual cost of the invoice was higher than the original quote. You have provided a copy of your receipt for the final cost of the repairs. The repairs did not modify the bathrooms in any way. The repairs restored the function of these bathrooms, as to what they had been. No other work was undertaken at the same time. The repairs were carried. You incurred and paid the expenses personally. You made a claim to the insurer but this application was rejected. You received no money from your insurer.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10

Reasons for decision: Detailed Reasoning - Repairs: Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: • the extent of the work carried out represents a renewal or reconstruction of the entirety, or • the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or • the work is an initial repair. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Application to your case: In your case, you own a rental property which has been available for rent for several years and from which you derive assessable income and for which you incur expenses. A routine inspection of the property revealed that that the two bathrooms in one of the units (an ensuite and a general bathroom) were in terrible condition. There was considerable water damage: timber rot, loose tiles and unstable flooring; all due to leaking showers. Water was also leaking downstairs into the hallway. The work performed included: • removal of water damaged areas • remove and clean mould • replace wall insulation • repair of flooring, the door jambs and feature architraves, • replace water proofing • replacing the bottom row of floor and wall tiles, • installation of a new shower screen The materials used were similar to those they replaced. This work restored the efficiency of function of the property without changing its character and is, therefore, considered to be deductible repairs. That is, this work is not regarded as capital in nature and is regarded as normal maintenance expenditure. Therefore a deduction is allowable under section 25-10 of the ITAA 1997.