Private ruling: Rental property expenses
Published: October 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the replacement of the roof on your rental property? | A1: Yes | Q2: Are you entitled to a capital works deduction for installing insulation to the roof of your rental property? | A2: Yes

Relevant facts and circumstances: Over X years ago you purchased a property which was built over Y years ago. You have continually rented this property for more than X years. At the time of purchase, the property had an asbestos roof which was sealed and an extension at the rear of the house that was constructed sometime prior to you purchasing the property. Over the years there have been ongoing problems with the asbestos roofing associated with the permeability of the roof with sections being cracked and degrading. Over the years you have carried out work to the roof but these works did not correct the problems. Continued problems occurred as a result of the permeable nature of the asbestos resulting in internal mould to ceilings and damage to walls. You undertook to replace the asbestos roof and guttering with that of colorbond sheeting due to the poor condition of the whole roof as it was proving difficult to continue to repair and prevent further damage to the property. The roof for the extension was corrugated iron and was constructed with a one degree pitch. This has caused backflow of stormwater into the ceiling of the room and rusting of the roof. You have replaced the rusted corrugated roof with similar like material and increased the pitch of the roof to the recommended pitch of five degrees. You have added insulation material to the roof. No other structural or shape modifications were made. You have provided a copy the builder's invoice listing costs and payment for the work carried out.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10, | Income Tax Assessment Act 1997 Division 43 and | Income Tax Assessment Act 1997 Section 40-10.

Reasons for decision: Summary: 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. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant. Taxation Ruling TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: · the repair is an initial repair · 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'. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. Taxation Ruling TR 97/23 states that the word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1961) 106 CLR 377 at 385). Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety' | Detailed Reasoning - Initial repair: The work undertaken is not considered to be an initial repair. | Detailed Reasoning - Repair or improvement: 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. Paragraph 16 of TR 97/23 states that to repair property, improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. 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. In your case, the asbestos roof on your rental property had deteriorated and the roof was leaking. You replaced the asbestos roof with colorbond metal sheet roofing. You have also replaced the rusted corrugated iron roofing to the extension with similar like materials. In addition you have installed insulation between the metal roof and roof battens. | Detailed Reasoning - Roof: It is accepted the use of colorbond to replace the asbestos roof constitutes a repair as the change in material did not improve the efficiency or function of the property. The roof has merely been repaired by its modern equivalent which restored the original function. Similarly, the replacement of the rusted corrugated roofing to the extension is considered to be a repair. Therefore, you are entitled to a deduction for the cost of replacing the asbestos roof and corrugated roof of your rental property under section 25-10 of the ITAA 1997. | Detailed Reasoning - Roof insulation: You incurred expenses in installing insulation material in the roof. The expenditure incurred is considered to be an alteration or improvement to the building and qualifies as a capital works expense and is not deductible under section 25-10 of the ITAA 1997. However, Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes. The rate of deduction for capital works for a residential rental property is 2.5% of construction expenditure over 40 years.

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