Private ruling: Rental property expenditure
Published: July 2012
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2011
Date scheme commenced: 1 July 2008

Ruling: Q1: Are you entitled to a repairs deduction for your portion of the costs incurred for the following work done to your rental properties: · replacing faulty roof tiles · capping mastic · replacing water damaged plaster · repainting · repairs to swollen architraves, skirting boards · new light · replacing damaged pipes and electrical rewiring, · replacing damaged shelving and · replacing doors? | A1: Yes. | Q2: Are you entitled to claim a capital works deduction at the rate of 2.5% for your portion of the following expenditure incurred for your rental properties: · replacing kitchen cupboards · replacing laundry cupboards · built in bedroom cupboards · switchboard replacement and RCDs · waterproofing and retiling bathroom · new shower and shower screens · new toilet · vanity units and tap set and · fixed mirror cabinet? | A2: Yes. | Q3: Are you entitled to a deduction for your portion of the decline in value for the following items: · exhaust fans · oven and electric hotplates · laminate flooring · curtains and drapes · new freestanding wardrobe · washing machine · air conditioner · dishwasher and · hot water system? | A3: Yes. | Q4: Are you entitled to a deduction for the repairs to the next door apartment caused by your water leakage? | A4: Yes. | Q5: Are you entitled to a deduction for the following expenses: · flowers for tenant's help · replacement radio · groceries and · shoe repairs? | A5: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Summary: You are not entitled to a full deduction for the work completed on your rental properties. However work such as: · the repainting · replacing tiles and capping mastic · replacing water damaged plaster, pipes, electrical wiring and shelving · repairs to swollen architraves, skirting boards, doors and · new light · all restore the efficiency of function, do not provide any substantial improvement, and are considered deductible repairs. Works that are capital in nature are not an allowable repair deduction. A deduction for the relevant percentage of certain capital expenditure is allowable under the capital works provisions. The replacement of cupboards, bathroom vanity, shower, toilet, retiling, switchboard and replacing the electrical wiring are considered capital expenditure and deductible capital works. Where items are depreciating assets, a deduction is allowed for their decline in value. Such items include exhaust fans, oven, hotplates, laminate flooring, curtains, washing machine, freestanding wardrobe, air conditioner, dishwasher and hot water system. Other expenses such as flowers, radio, groceries and shoe repairs that do not have a sufficient connection to the earning of your current rental income are not allowable deductions. | 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 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. You have incurred expenses for the following work on your rental properties: · painting · replacing damaged tiles, pipes, electrical wiring and plaster · capping mastic · repairs to swollen architraves, skirting boards, shelving and doors · new light. The above items are not considered to be capital in nature. You have incurred these expenses to restore your property to a rentable state. Therefore you are entitled to a deduction for the associated repairs. | Detailed Reasoning - Capital works: Section 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. Section 43-10 of the ITAA 1997 requires that: · the capital works have an area in which capital works is carried out, the work is begun after 30 June 1997, and the expenditure incurred is for capital works that are owned or leased by the taxpayer (section 43-75 of the ITAA 1997); · there is an amount of construction expenditure incurred that is attributable to the capital works area (section 43-85 of the ITAA 1997); and · the construction area must be used in a deductible way at some time during the year of income for the purposes of producing assessable income. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997). The kitchen, laundry and built-in bedroom cupboards, bathroom vanity, taps, fixed mirror cabinet, shower and toilet, are separately identifiable items with their own function. As a consequence, they are an entirety in themselves and their replacement is a renewal of the entirety. The expenditure is capital in nature and not a deductible repair ( Lindsay v Federal Commissioner of Taxation (1960) 106 CLR 377; 12 ATD 197; (1960) 8 AITR 99). However the expenditure is regarded as construction expenditure for which a deduction is available under section 43-10 of the ITAA 1997. You have also incurred expenses for replacing the switchboards, RCDs and bathroom tiles. Items wired and fixed to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997. These expenses are incurred for items that do not go beyond being part of the setting of an income producing operation. The items form a permanent part of the fabric of the building and are considered to be capital works for Division 43 purposes. Such expenditure is capital expenditure for which a deduction is allowable under section 43-10 of the ITAA 1997 at the rate of 2.5%. | Detailed Reasoning - Depreciating assets: Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose. Ovens, hotplates, curtains, drapes, washing machine, freestanding wardrobe, air conditioner, dishwasher, hot water system, exhaust fans and removable floor coverings are regarded as depreciating assets for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction where they are used for income producing purposes. When a depreciating asset is destroyed, a balancing adjustment event occurs (section 40-295 of the ITAA 1997). The amount of the balancing adjustment is calculated by comparing the asset's termination value with its adjustable value (section 40-285 of the ITAA 1997). The termination value of a depreciating asset that is lost or destroyed is the amount or value received or receivable under an insurance policy or otherwise for the destruction. Please ensure that the insurance proceeds received for your carpets and curtains or other items are included in your balancing adjustment calculations. For details on how to calculate the allowable depreciation deduction, please refer to the Australian Tax Office's Guide to depreciating assets which is available on the website www.ato.gov.au. Please note these items are regarded as capital expenditure and therefore not deductible as repairs under section 25-10 of the ITAA 1997. | Detailed Reasoning - Deductions: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. The repairs to the next door's items due to your water leakage are sufficiently connected to the earning of your rental income and are therefore an allowable deduction. However, you have not explained how the cost of a replacement radio is incurred in earning rental income given that the relevant property is rented out unfurnished. As you have not shown that this cost is incurred in earning assessable income, a deduction is not allowable. Also, other expenses for flowers for the tenant's help, groceries and shoe repairs are not sufficiently connected to your rental income and therefore no deduction is allowed. | Detailed Reasoning - Other information: Please note, for the one property that you co-own, you are only entitled to a portion of any allowable deductions in accordance to your legal title in the property.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You have owned some rental properties for several years. The properties are managed by real estate/property managers. | Parts of your rental properties suffered water damage for various reasons. | You have incurred expenditure in relation to the damage.