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Edited version of private ruling

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Ruling

Subject: rental property repairs

Is the cost of structural damage to the bathroom cabinet and internal walls, due to the penetration of water beneath the floor and wall tiles, deductible as repairs and maintenance of a rental property?

Yes.

Relevant facts and circumstances

You purchased a property with two other persons as tenants in common about four years ago. The property has been leased continuously since that time.

At a property inspection you became aware that water had penetrated behind and into the structure of the bathroom cabinet causing it to swell and break apart at a number of joints. Water had also penetrated behind the wall and floor tiling as was evidenced by seepage through the single course brickwork causing dampness and bubbling of the paint on the other side of the adjoining wall.

Due to the extent of the water damage, it was determined that all of the floor and wall tiles would need to be removed and replaced along with the damaged cabinet. It was determined that a partial repair of the tiled area was not feasible due to the extent of the water damage.

The damage was first observed during a property inspection. The previous inspection which was about six months earlier showed no signs of damage.

Reasons for decision

Section 25-10 of the Income Tax Assessment Act 1997 provides that you can deduct expenditure you incur for repairs to premises if you use the premises for the purpose of producing assessable income, however you cannot deduct capital expenditure under this section.

Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred for repairs is an allowable deduction. This ruling indicates that expenditure for repairs to property is of a capital nature where:

Expenditure incurred to remedy defects, damage or deterioration in existence at the time property is acquired is an initial repair and not deductible under section 25-10 of the ITAA 1997. It is immaterial that at the time the taxpayer may have been unaware of the condition of the property, including its need for repair.

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). The word repair is not defined within the tax legislation and takes its ordinary meaning. Repair involves a restoration of a thing to a condition it formerly had without changing its character (W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710).

An improvement provides a greater efficiency of function and involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. If the work done restores a previous function, or restores the efficiency of the previous function, it does not matter that a different material is used.

Some factors that point to work done to a property being an improvement include whether the work will extend the property's income producing ability or extend the property's expected life or reduce the likelihood of repair bills in the future.

In your case, you incurred expenses to have work done to the bathroom as a result of water damage that was noted during a routine inspection of the property. The previous inspection, about six months earlier, showed no signs of water damage. The property has been income producing for a number of years and there was no evidence that the cause of the problem existed at the time of purchase.

The work done is therefore in the nature of a repair and no part of it is considered to be a capital outlay.

Therefore, you are entitled to a deduction for your share of the repair costs according to your ownership interest in the property.

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