Edited version of private ruling

Authorisation Number: 1011590079594

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Ruling

Subject: Deductions - repairs

1. Are you entitled to a deduction for your share of the cost of replacement of roof, guttering and downpipes?

Yes.

2. Are you entitled to a deduction for your share of the cost of replacement of the vinyl flooring in the building with new vinyl floor tiles?

Yes.

3. Are you entitled to deduction for your share of the cost of repairing the staff toilets in the building?

No.

4. Are you entitled to a deduction for capital works of 2.5% of your share of the cost of replacing the staff toilets in the building?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased land and building from the Company.

The building has at all times been leased to the Company.

The building is leased at the market rate of rent, with the last market review undertaken several years ago.

The building is a large open plan showroom, plus adjoining sheds.

The building was built in the 1970s.

The Company uses the building to carry on its business.

During the 2009-2010 income year, three broad areas of repairs were carried out on the building:

· the roof - the removal and replacement of roof sheeting, guttering and downpipes

· the floor - the removal and replacement of the entrance floor, and

· the staff toilets.

Of the total cost of the work, you contributed part and the Company contributed the balance.

Roof repairs

The condition of the roof prior to the repairs being performed was poor.

The roof was rusty and had been patched many times.

The roof and gutters leaked constantly causing frequent damage to stock, fittings and ceilings.

The roof cladding was the original cladding.

The work performed to repair the roof is summarised as follows:

· corrosion and advanced wear and tear necessitated that the existing roof sheeting, guttering and down pipes be removed and replaced with new material

· the existing roof insulation was retained

· the new roof sheeting and guttering material were an exact replacement of the existing material

· the existing sheet metal downpipes were replaced with PVC downpipes. PVC downpipes are less expensive and were adopted for corrosion resistance

· the replacement of the roof surface necessitated the prior removal of existing air conditioning and evaporative units from the rooftop. The units were reinstalled in 'as is' condition on completion of the roof replacement works.

Flooring

The vinyl flooring in the entrance was in poor condition. It was torn in many places and the tears were covered by tape.

The work performed to repair the vinyl flooring is summarised as follows:

· the existing floor finish in the entrance area being past its useful life was replaced with new vinyl

· the original sheet vinyl is no longer in production (dating from the 1980s) and accordingly the affected floor was resurfaced in vinyl tiles (to match the adjacent floor in the checkout area). These materials are equivalent in terms of cost.

Staff bathrooms

The items replaced in the staff toilets were the original items and were in a run down condition. Some tiles were cracked or missing and some of the cisterns were not operating property.

The work performed to repair the toilets is summarised as follows:

· removal and replacement of all wall and floor finishes

· removal and replacement of toilet partitions

· removal and replacement of sanitary-ware (including toilet pans and urinals)

· removal and replacement of hand basins

· removal and replacement of mirrors

· removal and replacement of (hard wired) light fittings

· removal and replacement of (hard wired) exhaust fans

· the existing ceilings and doors were retained (and repainted).

Intrinsically, the toilet work took the form of replacement of existing materials with equivalent new materials.

Whilst the repairs were being performed, temporary toilets were provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 43-10

Income Tax Assessment Act 1997 Subsection 43-25

Income Tax Assessment Act 1997 Subsection 43-70

Reasons for decision

Repairs

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to a rental property. 

To be eligible to claim such an expense you must be holding the property for the purpose of gaining or producing assessable income, and the expenses must not be capital in nature. 

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.  

The meaning of repairs 

The term repairs is not defined in section 25-10 of the ITAA 1997. Therefore, it is necessary to look at its ordinary meaning. Paragraph 13 of Taxation Ruling TR 97/23 states the following: 

The word repairs has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. 

At paragraph 44, the ruling goes on to state: 

In the case of a repair, broadly speaking, the work restores the efficiency of function of the property without changing its character... 

Repair is distinct from renewal or replacement 

Renewal, replacement, or reconstruction of, the whole or substantially the whole of a thing or structure (entirety) is likely to be considered a capital improvement rather than a deductible repair. 

What is an entirety? 

Determining what is an entirety is a question of fact in each case. According to TR 97/23, property is more likely to be an entirety if: 

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

· 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.

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

In the case of W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (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. It was held that the roof would be considered to be part of the building and the work done on the roof was a repair. This view is confirmed in TR 97/23 at paragraph 40. 

Improvement or repair 

When work is done to restore or fix a damaged item, we need to determine if the work undertaken is a repair or an improvement. Repairs generally restore the item to its former function and efficiency whereas improvements increase an items functionality and/or efficiency.  

A repair may increase the items efficiency slightly and still be classed as a repair. However, where the item's function or efficiency is improved substantially or the work changes the function of the item, the work is considered to be an improvement and capital in nature.

Question 1

Summary

The cost of replacing the roof is an allowable deduction under section 25-10 of the ITAA 1997.

Detailed reasoning

In your case, you purchased the building and it has been leased to the Company at all times since then.

The roof, gutters and down pipes were in a poor condition. They had been damaged or had deteriorated as a result of wear and tear over the period that the building had been leased, and they now leak.

The new roof sheeting and gutter replacements were an exact replacement of the existing material. The sheet-metal downpipes were replaced with PVC downpipes, the less expensive option. The roof was merely repaired by its modern equivalent and to restore the original function. 

Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'.

The required work to rectify the problem is not an initial repair, is not the replacement of an entirety, and is not an improvement. 

Therefore, when you are replacing the roof, the work carried out is a repair, and deductible under section 25-10 of the ITAA 1997.

Question 2

Summary

The cost of replacing the floor is an allowable deduction under section 25-10 of the ITAA 1997.

Detailed reasoning

The floor finish in the entrance was past its useful life and was torn in many places. The floor finish that was replaced was sheet vinyl. That vinyl is no longer in production and accordingly the floor area was resurfaced with vinyl tiles.

Although the floor material used in the replaced floor is different, the material performs the same function without improving it substantially.

A floor is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'.

The required work to rectify the problem is not an initial repair, is not the replacement of an entirety, and is not an improvement. 

Therefore, when you are replacing the floor, the work carried out is a repair, and deductible under section 25-10 of the ITAA 1997.

Question 3

Summary

The cost of replacing the staff toilets is not an allowable deduction under section 25-10 of the ITAA 1997.

Detailed reasoning

The staff toilets were in poor condition due to wear and tear over a long period of time, including cracked or missing tiles and malfunctioning cisterns.

The work involved included replacement of all wall and floor finishes, toilet partitions, sanitary-ware, mirrors, lighting and exhaust fans. Existing materials were replaced with equivalent new materials.

In Case W77 89 ATC 698; (1989) 20 ATR 3888 the owner of a rental property was denied a deduction for a remodelling of a bathroom, amongst other expenditure, where repair was needed because of age, deterioration and general wear and tear. It was held that the work done in remodelling the bathroom was extensive and could be described as a complete renovation designed to improve the unit rather than simply to restore it.

In your case, you replaced the entire interior of the staff toilets, which indicates a renovation rather than a repair. Remedying defects would be limited to repairing or replacing individual damaged items, such as replacing only the damaged tiles and malfunctioning cisterns. Although your intention may have been to restore the efficiency of function of the items replaced, you have gone beyond repairing worn items to a complete renewal of the staff toilets as a whole.

Therefore, when you are replacing the staff toilets, the work is considered to be a capital improvement and is not deductible as a repair under section 25-10 of the ITAA 1997.

Question 4

Summary

A portion of the cost of replacing the staff toilets is an allowable deduction under section 43-10 of the ITAA 1997.

Detailed reasoning

Section 43-10 of the ITAA 1997 operates 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 include buildings and structural improvements or an extension, alteration or improvement to a building. This includes the complete replacement of a kitchen or bathroom, which is a replacement of an entirety and therefore capital in nature.

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 rental property is 2.5%. A deduction cannot be made until the completion of the capital works.

In your case, you replaced the staff toilets in their entirety. Therefore, you are entitled to a deduction for capital works of 2.5% of your share of the expenses incurred in replacing the staff toilets.

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