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Edited version of private ruling

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Ruling

Subject: rental property repairs

Questions and answers

Are costs associated with electrical re-wiring a commercial property and replacing the switchboard classified as repairs?

Yes

Can these costs be claimed as a deduction in the 2010 tax return as repairs and maintenance against rental income?

Yes

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

The scheme that is the subject of this ruling.

The property was acquired as tenants in common.

The property was rented from time of purchase to current date.

Property is managed by Real Estate Agent

The partnership is the landlord.

The property is rented at commercial rates

The property is not used by the landlords.

The building was constructed around 1920 and was becoming apparent that the switchboard and wiring of the building had deteriorated with age and no longer up to current standards.

The partnership initially received correspondence that the electrical installations needed repairs due to certain defects. If not attended to the electrical supply would be cut off.

Work was undertaken and involved replacing the main switchboard, re-wiring redundant cabling, installing emergency lighting and sensors, distribution sub-boards and fittings.

The work was required to be undertaken to ensure system was up to standard and safe for tenants to use.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 25-10(3).

Explanation (This does not form part of the ruling)

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.

The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In (W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58); (1965) 14 ATD 78; (1965) 9 AITR 710, 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.

Taxation Ruling TR 97/23 indicates that expenditure for repairs to property is of a capital nature where:

Case V167 88 ATC 1107; AAT Case 12 (1986) 18 ATR 3056 (Case V167) concerned a taxpayer who upon employing an electrician to replace a power point was advised that the wiring was unsafe and that the rental property would need to be rewired.  It was held that the rewiring did nothing more than effect repairs to the property and that the work carried out did not cease to be a repair because a few power points were added or relocated. The power points only served as convenient points of connection to a power supply. Accordingly the works carried out in rewiring the property were allowable.

In your case, you have owned the property for over x years and the property has been income producing for all these years. The need for repairs was occasioned by factors which occurred during the period of income production. The facts in Case V167 are similar to your circumstances. We consider the replacement of the damaged wiring and switchboard to be a repair; the work merely restoring the property to its previous original efficiency of function.

The replacement of the damaged wiring and switchboard is also not considered to be an entirety as it is incapable of providing a useful function without regard to any other part of the premises and is not a separate and distinct item of plant in itself from the thing or structure which it serves.

In addition, replacement of the damaged wiring and switchboard is not considered an improvement as the work done merely returns it to the condition it was in before the need for the work arose.

Therefore, the expenses you will incur to replace the damaged wiring and switchboard to the property is considered to have the essential character of a repair and is an allowable deduction under section 25-10 of the ITAA 1997.

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