Private ruling: Rental Deductions
Published: December 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for your share of qualifying work carried out to your investment property? | A1: Yes. | Q2: Are you entitled to a capital works deduction for your share of qualifying work carried out to your investment property? | A2: Yes. | Q3: Are you entitled to claim for your share of the deduction for the decline in value of relevant items at your investment property? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 40-25 | Income Tax Assessment Act 1997 Section 40-30 | Income Tax Assessment Act 1997 Section 40-285. | Income Tax Assessment Act 1997 Section 43-10 | Income Tax Assessment Act 1997 Section 43-20

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for that purpose. However, a deduction is not allowable for outgoings that are of a capital, private or domestic nature. Section 25-10 of the 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 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. 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. In your case, you have incurred expenses for the following work on your rental property: · paint & painting costs · new hall linen door and repairs to shelving · waste & rubbish removal · repairs to all walls and timber due to termite and water damage · repairs to bathroom wall and waterproofing · repairs to driveway and fence palings · sealing of external cladding, brick junctions and meter box · carpet and block wall cleaning · replacement of 2 patio floor tiles and bricks on stairs · replacement of carport posts and flashing to carport storeroom · refitting internal doors, front gate and repairs to door jambs where required · supply and installation of sliding cupboard doors to bedrooms 2 and 3 · replacement tiles to kitchen, bathroom, laundry and toilet · replacement of skirting and architraves where required · replacement of damaged exposed beam in lounge area · replacement of illegally installed power point · refix front gate to pier · additional wall sheeting repairs to main bedroom due to water damage · rectification to front brick pier As a result you have incurred expenses to restore your property to a rentable state. The above items are not considered to be capital in nature. Therefore, you are entitled to a deduction in respect of your share of these repairs. Capital works Section 43-10 of the ITAA 1997 operates generally to provide a deduction for capital expenditure on capital works used to produce assessable income. A deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. This is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works. Capital works includes buildings and structural improvements or an extension, alteration or improvement to a building. In your case, the following work is considered to be a renewal or reconstruction of the entirety: · new kitchen cupboards · plumbing to connect bathroom, toilet, kitchen and laundry · laundry fitouts & new vanity · toilet, bath, shower screen, tub and tapware · new door locks to front and laundry doors · new door lock to carport storeroom · soil removal and installation of a waterproof membrane and pipe drain · slab to shower recess and installation of termite proof mesh · light fittings · double power points and new light switches · installation of electrical conduit, with drain to bedroom area Therefore you are entitled to your share of the capital works deduction for the above items. Decline in value A new cook top and rangehood are depreciating assets within the definition in subsection 40-30(1) of the ITAA 1997. A deduction is allowable for these costs under section 40-25 of the ITAA 1997. They have a limited effective life and can reasonably be expected to decline in value over the time they are used in the rental property. Therefore, you are entitled to a deduction in respect of them under Division 40 of the ITAA 1997.

Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | · the application for private ruling | · supporting documents for the private ruling request in respect of a claims for repairs and maintenance including | · building quotes and invoices, | · pest control report and invoice, | You and another each own an equal share in a rental property. | The property was first made available for rent in the 2007 financial year. | As you both live interstate, the property is managed by a property manager. | Pest controllers were engaged to inspect the premises and upon inspection termites were discovered. It was reported that several termite nests were discovered including one found in between the walls of the shower and toilet. The damage detected was found to be wide spread with all accessible timbers and other materials showing signs of attack. | The damage was to internal joinery of the property which meant that areas other than the shower and toilet would be affected. Furthermore it was reported that the termite risk on the property was considered to be high due to the fact some areas of the property were not readily accessible. | The house was treated with a form of chemical barrier to repel and remove termites. Following the detection of termites and damage to the structure of the property, a quote for damages was drafted by a builder. | Structural repairs were conducted on the areas affected by termites, being toilet, laundry and all surrounding areas including: | · Removal and installation of internal walls to bathroom, bedroom, hall and laundry | · Removal and installation of internal walls to kitchen, lounge and toilet | · Removal and installation of kitchen cupboards, toilet and vanity | · Removal and installation of bathroom shower screen, tub, and tapware | · Plumbing and waste & rubbish removal | · New cook top, rangehood, Light fittings, power points and new light switches | · Refitting internal doors, supply and installation of sliding cupboard doors | · Replacing of skirting, architraves and damaged exposed beam in lounge area