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Edited version of private ruling
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Ruling
Subject: Rental property expenses
Question and answer:
Are you entitled to a deduction for the cost of repairs to the deck of your rental property?
Yes.
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commenced on:
1 July 2010
Relevant facts and circumstances
Several years ago you purchased the property. It has always been used as a rental property since you purchased it.
The pre-purchase building inspection did not find any defects to the deck.
In the financial year ended 30 June 2011, you discovered that damage had occurred to the structural framework of the deck.
As a result of this damage, you repaired part of the deck.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10.
Reasons for decision
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 Income tax: deductions for repairs indicates that expenditure for repairs to property is of a capital nature where:
· the extent of the work carried out represents a renewal or reconstruction of the entirety, or
· the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or
· the work is an initial repair.
Case V2 88 ATC 107; AAT Case 4012 (1988) 19 ATR 3038 concerned partial underpinning of a rental property caused by excessive drying of the subsoil. It was found that the foundations were restored to their former efficiency in function without the essential character of the foundations being altered. The repairs to the foundations were not capital in nature, as they did not change the nature and character of the building and as such were deductible as repairs.
In your case, you have owned the property for several years and the property has been income producing for the entire period of your ownership. The need for repairs was occasioned by factors that occurred during the period of your ownership and were not apparent when you purchased the property. Only part of the deck was repaired to its original condition. As the essential character of the deck was not altered, the work is therefore considered to be a repair and not capital in nature.
Therefore, the expenditure incurred relating to the repair of the deck is deductible under section 25-10 of the ITAA 1997.
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