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Edited version of your private ruling

Authorisation Number: 1012118812225

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Ruling

Subject: rental property expenses

Question 1

Are you entitled to a repairs deduction for the following work carried out to your investment property;

Answer

Yes

Question 2

Are you entitled to a capital works deduction for new tap ware installed to match a new toilet and basin in your investment property?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You had to undertake work on your rental property in the 2010-11 financial year due to damage to items, and to eliminate foul odours throughout the house.

The damage was caused during a tenancy in which the property had been let to a single individual but a larger number people had been living there.

You replaced the following broken items:

You also:

You replaced the basin taps to update the appearance as the old ones were an old style and rusty. The new tap ware was a much better match for the new basin and toilet.

The damaged items were identified in a rental property inspection in July 2010.

You will not receive any insurance in compensation and you have kept written evidence to support your claim.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10,

Income Tax Assessment Act 1997 Section 43-30,

Income Tax Assessment Act 1997 Section 43-25,

Income Tax Assessment Act 1997 Subsection 43-25(1).

Income Tax Assessment Act 1997 Section 43-10,

Income Tax Assessment Act 1997 Section 43-75

Income Tax Assessment Act 1997 Section 43-85.

Reasons for decision

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, to the extent that the expenditure is not capital in nature.

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during income producing use of the property or to defects that emerge suddenly during that time.

TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.

It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.

In your case, you have incurred expenses for work on your rental property in relation to:

You have incurred the expenses to restore your property to a rentable state. The above items are not considered to be capital in nature and you are entitled to a deduction for these expenses as repairs.

Capital works

Section 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997).

In your case, you have incurred expenses for new tapware to match a new basin and toilet in your rental property and you are entitled to a capital works deduction for the tapware expenses.

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