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Edited version of your private ruling
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Ruling
Subject: Rental property deductions
Question 1
Is the expenditure incurred to replace a veranda on your rental property deductible as a repair?
Answer
Yes.
Question 2
Is the expenditure incurred to replace a pathway and driveway on your rental property deductible as a repair?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You and your spouse own a rental property.
Over time the veranda has been damaged due to wear and tear and now contains rotten timber bearings and joists.
You and your spouse have obtained a quote to repair the veranda with the same materials.
The pathway and driveway at the rental property are currently made from concrete bricks.
The bricks have been washed out over time and also contain damage from tree roots.
The pathway is not level, and is dangerous for anyone that visits the property.
The current pavers must be removed and cannot be reused.
The tree roots need to be removed from the ground and concrete will be used along the existing paths as a cheaper alternative to new pavers.
You and your spouse have obtained a quote to replace the current pathway and driveway with concrete.
The veranda, pathway and driveway will be the same dimensions, in the same position and made of the same materials as the existing structures.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-10.
Reasons for decision
Question 1
Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs made to premises or depreciating assets used for producing assessable income. However, subsection 25-10(3) of the ITAA 1997 denies a deduction for repairs where the expenditure is of a capital nature. An improvement to a property would be capital in nature and therefore not deductible.
Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a 'repair' involves a restoration of a thing to a condition and efficiency it formerly had. 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.
In this case, the rental property's verandah had deteriorated over time. The required work to rectify the problem is not the replacement of an entirety, as the verandah is considered only part of the building (it is not separate to the building and is not capable of providing a useful function without regard to any other part of the premises); and is not an improvement, as similar materials were used and the work simply restores the property to a condition of good working order.
Therefore, the replacement of the verandah is a repair to the rental property and your share of the cost is deductible under section 25-10 of the ITAA 1997.
Question 2
TR 97/23 provides that where the work done to a property results in a greater efficiency of function in the property the work represents an 'improvement' rather than a 'repair'. Renewal, replacement, or reconstruction of, the whole or substantially the whole of a thing or structure (entirety) is likely to be considered a capital improvement rather than a deductible repair.
In this case, the rental property's pathway and driveway is made of concrete bricks and has become damaged over time. The entire pathway and driveway will be removed and replaced with concrete. The driveway and pathway are separately identifiable capital items with there own function. Therefore, the replacement is a renewal of an entirety and the expenditure is not deductible as a repair under section 25-10 of the ITAA 1997.
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