Edited version of private ruling

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Ruling

Subject: Replacement of carpet

Are you entitled to a deduction for the cost of replacing carpet?

No.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You acquired a property a few years ago which you rented out until you moved in to the property and used it as your residence during the 2008-09 income year.

You replaced the carpet after the tenant moved out because the carpet was stained.

It is your understanding that the carpet was originally put in more than five years ago and was fully depreciated by the time you replaced it.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

The general deduction provision of the tax legislation is section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). A deduction is allowed under this section for losses or outgoings to the extent that the loss or outgoing is incurred in gaining or producing assessable income. However, a deduction is not allowed under the section where the loss or outgoing is of a capital, private or domestic nature.

Section 25-10 of the ITAA 1997 specifically deals with repairs. It 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 may be deductible where they are incurred to remedy damage that occurred during the period the property was used for income producing purposes even if the work takes place after the property ceases to be available for rent.

TR 97/23 indicates that expenditure for repairs to property is capital in nature and is not deductible under section 25-10 of the ITAA 1997 if the extent of the work carried out represents a replacement, renewal or reconstruction of an entirety, rather than a replacement of subsidiary parts of a whole. 

An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' (Lindsay v. Federal Commissioner of Taxation (1960) 106 CLR 377; (1960) 12 ATD 197; (1960) 8 AITR 99).

TR 97/23 states that something will likely be considered an entirety if it is an item that is depreciable (a depreciating asset). Taxation Ruling TR 2010/2 lists carpet as a depreciating asset.

Generally, you can claim a deduction for the decline in value of a depreciating asset that is held for income producing purposes.

In your case, the replacement of the carpets is regarded as the replacement of an entirety. As such, the expense is capital in nature and not deductible under sections 8-1 or 25-10 of the ITAA 1997. Additionally, you cannot depreciate the carpet as the property is no longer held for income producing purposes.

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