Private ruling: Rental property expenses
Published: May 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction of the special levy relating to repairs for your rental property? | A1: Yes

Relevant facts and circumstances: You jointly purchased a property in the 1980's that was built in the1960's. Your property, one of a number in a block, has been available for rent continuously from the time of purchase. You were required to pay a compulsory Owners Corporation levy for your share of maintenance for external windows and door frames and render repairs and painting. The original wooden windows and door frames of the units were badly decayed and in need of repairs. Owners corporation obtained quotes for repair and painting of wooden frames. However, the corporation was advised that the work would have to be repeated in 5-10 years time. To avoid repetitive work in the future it was decided to replace the wooden frames with aluminium frames. The design and method of operation of the aluminium frames is identical to that of the original wooden frames. Even though a different material was used the aluminium frames restored the efficient function of the windows without changing their character. There was no structural change to the building as a result of the work. The work for installation of the frames, painting and render repairs was undertaken during the relevant financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-10

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature. The body corporate of your rental property complex has levied a special levy to fund repairs to the windows and door frames to all of the units. The character of an expense follows the purpose for which the expense was incurred. It follows that if the levy is used to fund expenditure which would be deductible then the contribution made is also deductible. To determine if the special levy is deductible, we first need to look at what the levy monies will be expended upon and the deductibility of those expenses. Section 25-10 of the ITAA 1997 states expenditure incurred by you for repairs to any premises, or part of premises, plant, machinery, tools or articles held or used by you solely for the purpose of producing assessable income is an allowable deduction. However, a deduction is not allowable if the expenditure is of a capital nature, for example, an improvement. Taxation Ruling TR 97/23 provides the Tax Office's view on repairs that are allowable under section 25-10 of the ITAA 1997 and indicates that expenditure for repairs to property is of a capital nature where: · The extent of the work carried out represents a renewal or construction of entirety, or · The work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or · The work is an initial repair In your case the work is not considered to be an initial repair and therefore it is only necessary to consider the first two points. | Detailed Reasoning - Replacement of a subsidiary part or an entirety: According to TR 97/23, property is more likely to be an entirety if: a) The property is separately identifiable as a principal item of capital equipment; or b) The thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or c) The thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or d) The thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income law. In the case of W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation [1966] ALR 915; 115 CLR 58; (1965) 14 ATD 78; 39 ALJR 246; (1965) 9 AITR 710, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building. In your case, the unit block is itself considered to be an entirety. The window and door frames are considered a subsidiary part of the unit block. Therefore the work carried out is not considered to be a renewal or construction of an entirety | Detailed Reasoning - Improvement v repair: 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, in 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. You have replaced the wooden frames to both the windows and doors with aluminium frames and have not changed the design of the window or door frames. The use of the aluminium merely constituted the utilisation of a modern equivalent and the work undertaken has merely restored the efficiency of the previous function and is not considered to be an improvement. As the work is not an initial repair, a renewal or reconstruction of an entirety or an improvement the work to the windows and doors is considered a repair. Therefore, you are entitled to a deduction of the special levy relating to repairs to the windows and door frames and rendering and painting. You can claim the deduction in the income year when you incurred the expense of the special levy.