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Edited version of private ruling

Authorisation Number: 1011643441462

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Ruling

Subject: Rental property expenses

Questions and answers:

1. Are you entitled to a deduction for inspections on your rental property?

2. Are you entitled to a deduction for the installation of a termite barrier system?

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 the property some years ago.

A pest report was done and there were no problems identified with the property.

You incurred charges for two reports that were carried and no problems were reported.

At the request of the tenants you installed chemical termite barriers to the external walls of the building. This necessitated drilling holes on external walls and drilling through the concrete and installing a chemical.

You have been renting the property out.

The property has been rented out since it was purchased.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (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, or relate to the earning of exempt income.

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 denies a deduction for repairs where the expenditure is of a capital nature.

You can claim a deduction for certain expenses you incur for the period your property is rented or available for rent.

Pest inspections are considered to be maintenance work. Inspections are usually performed to identify potential damage caused by pests and control is then undertaken to eradicate or prevent pests before they cause damage or deterioration to property. This is considered an allowable deduction.

Therefore the costs associated with pest control are an allowable deduction under section 8-1 of the ITAA 1997.

Installation of a termite treatment barrier system

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:

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 item's functionality and/or efficiency.

A repair may increase the items efficiency slightly and still be classed as a repair. However, where the items 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.

In your case the installation of the termite treatment barrier was not the replacement of one already in existence and is an improvement to your rental property rather than a repair.

The termite treatment barrier system is capital in nature and is not deductible under either section 8-1 or 25-10 of the ITAA 1997.

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