Edited version of private ruling

Authorisation Number: 1011720229671

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Ruling

Subject: Rental property expenses

Questions

1. Are you entitled to claim a deduction for repair work undertaken on your rental property in the 2010-2011 income year?

Answer: Yes.

2. Are you entitled to claim a deduction for purchasing a new air conditioner on your rental property, after the tenancy has ended?

Answer: No.

3. Can you claim a deduction for repairs to a rental property in a year after it ceased being income producing?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You rented out your property for several years.

You are moving back into the property.

You have noticed the following items that require maintenance:

· Air Conditioner no longer working - needs replacing.

· Floor boards in living room, bedrooms and hallways need re-polishing due to considerable wear and tear.

· Repair of gravel driveway due to weather causing erosion.

· Repair of downstairs toilet as it is loose from floor.

· Re-painting the entire house as like for like as the walls have faded/weathered, scratches and dints in walls and ceiling.

· Repair of plaster wall beside laundry tap due to damage.

· Repair antenna on roof due to weather conditions.

· Repair to guttering above bedroom 1 due to leaking guttering, repair to downpipe outside of upstairs bathroom due to coming away from wall.

· Repair/replace bi fold door in living room as the house has settled and the door no longer opens due to being out of square.

You are financially unable to complete all repairs to the property in the current income year due to the large number of repairs needed.

You wish to claim deductions in future income years for repairs that won't be done in the current income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Subsection 40-25(7).

Income Tax Assessment Act 1997 Section 40-25.

Income Tax Assessment Act 1997 Subsection 40-30(1).

Reasons for decision

Question 1

The meaning of repairs

Section 25-10 of the Income Tax Assessment Act 1997 (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. Therefore, to qualify for a deduction under section 25-10 of the ITAA 1997 the expenditure must:

(a) be a repair

(b) not be expenditure of a capital nature; and

(c) be in respect of an asset used in the production of assessable income.

The word 'repairs' is not defined in the ITAA 1997. In its context in section 25-10 of the ITAA 1997, the word 'repairs' bears its ordinary meaning. Paragraphs 13-16 of Taxation Ruling TR 97/23 specifically deal with the ordinary meaning of repairs. The word repair ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damaged or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

Paragraph 16 of TR 97/23 states 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 and is deductible under section 25-10 of the ITAA 1997.

TR 97/23 refers to the case of W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR; (1965) 14 ATD 78; 1965 9 AITR 710, where it was held that a repair involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.

TR 97/23 discusses the situations in which repair expenditure is of a capital nature, and therefore not deductible under section 25-10 of the ITAA 1997. Those situations include where:

· there is a reconstruction of the entirety

· the repairs are initial repairs, or

· the expenses are for improvements.

In your case the following items are not considered to be capital in nature:

· Floor boards in living room, bedrooms hallways need re-polishing due to considerable wear and tear.

· Repair of gravel driveway due to weather causing erosion.

· Repair of downstairs toilet as it is loose from floor.

· Re-painting the entire house as like for like as the walls have faded/weathered, scratches and dints in walls and ceiling.

· Repair of plaster wall beside laundry tap due to damage.

· Repair antenna on roof due to weather conditions.

Therefore if the above repairs are carried out in the 2010-2011 income year, a deduction is allowable under section 25-10 of the ITAA 1997. However, if these repairs are carried out after 30 June 2011, they are not considered to be used for income producing purposes and no deduction is allowed.

Question 2

New air conditioner

The installation of new air conditioning is a capital expense and as such is excluded as a deductible repair (paragraph 33 of TR 97/23). However, as they are depreciating assets, a deduction for the decline in value may be allowable.

Decline in value (depreciation) for the new air conditioner

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. Taxable purpose is defined in subsection 40-25(7) of the ITAA 1997 to mean for the purposes 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, you wish to install a new air conditioner for your property after the income producing function of the property had ceased. You are therefore not entitled to a deduction for the decline in value under section 40-25 of the ITAA 1997.

Question 3

The cost of repairs to a property after cessation of income producing use is covered in Taxation Ruling IT 180. Paragraph 4 states that a deduction may be allowed for the cost of repairs to property providing:-

(a) the necessity for the repairs can be related to a period of time during which the premises have been used to produce assessable income of the taxpayer, and

(b) the premises have been used in the production of such assessable income of the year of income in which the expenditure is incurred.

In your case, the property had been rented out for 5 years and 6 months. It is accepted that the necessity for the repairs was attributable to the period of time that the property was being used to produce rental income for you. However the property is no longer income producing as you are now using the property as your main residence.

A deduction for repairs will only be allowed if the property has also been used for the production of assessable income during the year in which the expenditure is incurred.

In your case, you stated you wish to defer some of the repairs to later income years, after your property ceased being an income producing asset.

In applying the principles expressed in IT 180, any expenses incurred after 30 June 2011 will not have been incurred during a time when your property was being used for the production of assessable income. Therefore any expenditure incurred after this date in relation to the repairs will not be considered allowable deductions under section 25-10 of the ITAA 1997.

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