Edited version of private ruling

Authorisation Number: 1011566173429

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Rental property

1. Are you entitled to an immediate deduction for the following work carried out to your rental property

· sand and seal the floors

· replace affected floor boards in the kitchen

· repaint property

· replace burnt out power points

· replace/replaster ceiling?

Yes.

2. Are you entitled to a capital works deduction for the following work carried out to your rental property

· install packaged cupboards in the kitchen

· replace bathroom vanity?

Yes.

3. Are you entitled to a deduction for the decline in value of a stove, gas top and gas heating unit for your rental property?

Yes.

4. Are you entitled to a deduction for your travel expenses for the repair work done to your property?

Yes.

5. Can travel costs associated with capital works be added to the cost base of your property?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You purchased a property solely in your name.

The property was first around seven years ago.

The tenants reported a white ant infestation some two or three years ago.

Two reports indicated only one area was affected but the whole of the house was treated.

Repairs were carried out on the rental property.

The tenants occupying the property moved out and the following work was undertaken to rectify damage, wear and tear and deterioration to the property:

· remove old carpet you discovered five more areas of white ant damage - you did not lay down new carpet

· replace affected floor boards in kitchen

· install packaged cupboards in the kitchen (the old kitchen cupboards did not fit back into the kitchen area once the floor level had been restored)

· replace stove and gas top with new items

· replace water damaged bathroom vanity

· replace a gas heating unit

· all floors were sanded and sealed by a professional

· repaint the property

· replace burnt out power points

· repair the plaster water damaged ceiling.

All work other than that requiring a qualified plumber or electrician was carried out by you and your spouse.

You have provided a list of purchases for the work you undertook.

You have provided a summary of the kilometres you travelled to and from the rental property and for purchasing items.

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 43-25

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 110-25.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

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.

Section 25-10 of the 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 meaning of repairs

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition and efficiency 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.

TR 97/23 explains (at paragraph 16) 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.

Capital nature

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 that a repair.

What is entirety?

Paragraph 38 of TR 97/23 explains that a property is more likely to be an entirety if:

· the property is separately identifiable as a principal item of capital equipment, or

· the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves, or

· the thing or structure is a unit of property as that expression is used in the depreciation deduction provisions of the income tax law.

Improvement

While a repair restores the efficiency of the function of the property without changing its character, an improvement goes beyond this and provides a greater efficiency of function in the property. An improvement usually brings the property into a more valuable or desirable form or condition than a repair would and generally changes the character of the property.

However, different materials may be used to repair the property, for instance, repairing a property with its modern equivalent. A repair refers to the restoration of efficiency rather than the exact repetition of form and materials previously used. An improvement involves more than merely using a different material, it must also give a better result.

Immediate deduction items

Sanding and sealing floors and replacing burnt out power points

The work done does not result in greater efficiency of function and is not a renewal of an entirety. These items are considered repairs and are deductible under section 25-10 of the ITAA 1997.

Replacing floor boards in the kitchen

The floor boards were white ant infected and were replaced. Therefore a deduction is allowed as the work done is considered to be a repair.

Repainting of property

As deterioration is expected, painting is a repair or maintenance function and the expenses are an allowable deduction.

Replacing/replastering ceiling

The works done in replacing and replastering the ceiling is considered to be repairs as you have restored to the condition it was in in prior to water damage. A deduction is therefore allowed.

Capital works deduction

Division 43 of the ITAA 1997 allows a deduction for capital expenditure incurred in constructing capital works, including building and structural improvements, where a residential property is used for income producing purposes.

The deduction is available for the cost of constructing structural improvements or extensions, alterations or improvements to structural improvements if construction started after 26 February 1992.

For structural improvements the annual special building write-off allowable is 2.5 percent of the construction expenditure for a period of 40 years. Construction expenditure is the actual cost of constructing the capital works (section 43-25 of the ITAA 1997).

In your case, the following works are capital in nature and are considered to be capital works as the work goes beyond a mere repair for the purposes of Division 43 of the ITAA 1997:

· installation of packaged cupboards in the kitchen, and

· a replaced bathroom vanity.

Decline in value

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997).

In your case, the stove, gas top and gas heating unit are depreciating assets. Therefore, you are entitled to a deduction for the decline in value of these items.

Travel costs

Our publication Rental properties 2010 (NAT 1729) is a guide to help owners of rental properties determine what expenses are allowable deductions. Page 13 of the guide explains that when a taxpayer travels to inspect or maintain a rental property, they may be able to claim a full deduction for the costs of the travel where the sole purpose of the trip related to the property.

A deduction is only allowable for the time that the property is:

· rented out

· available for rental, or

· temporarily vacant while repairs are being carried out and will be available for rent once the repairs are complete.

In your case, you travelled several times between your place of residence and the rental property to arrange repairs and purchasing of items. You are able to claim a deduction for those travel expenses relating to the repairs under section 8-1 of the ITAA 1997. However, travel relating to capital works done is not deductible.

Cost base for capital gains tax (CGT) purposes

Travel associated with capital works may not be claimed as a deduction, however the part of a trip associated with capital works may be calculated and apportioned.

The travel associated with the capital works may be included in the cost base of the asset.

A residential rental property is a CGT asset. Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset consists of five elements. The fourth element of the cost base is capital expenditure incurred to increase or preserve the assets value (paragraph 110-25(5)(a) of the ITAA 1997). Included in the fourth element is the cost of travel to undertake capital improvements.

Therefore, as your travel was for both repair work and capital improvements, you will have to apportion travel expenses in a fair and reasonable manner.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).