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Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for the following work carried out to your rental property?

· costs of kitchen mixer, stop tap to toilet and lining of bathroom ceiling

· plumbing costs for unblocking of drains and repairs to bathroom

· electrical costs for replacement of damaged lighting, power points and switches

· purchase costs of paint and materials

· plastering and painting of damaged walls, ceiling, windows

· repairs and replacement of damaged doors, blinds, taps, locks, front gate, fence, porch, driveway, smoke alarms, laminate and tiles

· general repairs, maintenance and cleaning costs

Answer

Yes.

Question 2

Are you entitled to a capital works deduction for the following work undertaken to your rental property?

· modifying of fire place

· replacing overhead kitchen cupboards

· electrical wiring

· bathroom vanity

· shower recess

Answer

Yes.

Question 3

Are you entitled to claim a deduction for decline in value for replacing floor covering to the toilet?

Answer

Yes.

Question 4

Are you entitled to claim an immediate deduction for tools purchased that are eligible for a decline in value and used predominately to repair your rental property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You jointly own a rental property.

The property was built some years ago and has been continually rented since you purchased it.

You evicted your tenants for failure to pay outstanding rent.

You inspected the property and discovered extensive malicious damage to the property that was unliveable.

You made a claim with your insurer due to the malicious damage.

Insurance assessment confirmed that the damaged caused was unrepairable but only some of the damage was covered by insurance.

You received reimbursement for loss of rent for part of the period the repairs were carried out, replacement of floor covering through out of the property and replacement of kitchen cupboards.

The remainder of the work were undertaken by you with the use of a builder, plumber and electrician.

The property was re rented after the repairs were completed.

The bathroom was unrepairable and was replaced with similar or rather a modern version of materials and required extensive plumbing and electrical work.

The damages to property included:

· Front gate

· front and side fence palings

· porch

· Drain blockage

· Tyre and oil damage to driveway

· Kitchen cupboards pulled off and destroyed

· Damage to wood fire place

· Smoke alarm taken

· Laminex and tiles in kitchen destroyed

· Holes in wall and doors throughout the house

· Carpet damaged

· Broken blinds and windows

· Water damage to bathroom floor and walls due to leaks.

· Damaged bath, vanity and laundry basin

· Light fittings including down lights torn from the ceiling and destroyed

You have provided copies of invoices and receipts for all the work and supplies paid for as follows:

· Modifying fire place from a wood fire to a pump heater, installing overhead kitchen cupboard and mixer and lining of bathroom ceiling

· Excess costs for floor covering to toilet

· Plumbing costs for unblocking drains, labour and parts for bathroom work

· Electrical works and purchases for replacing damaged light fittings, switches, power points and wiring

· Purchases for tools used to repair the damage to the property

· Purchase of paint and materials for painting of the property throughout

· Purchase of bathroom items to replace damaged vanity, bath, mixers, laundry basin and bathroom tiles

· Miscellaneous expenses to carry out numerous repairs that include, timber, plaster, screws, nails, doorknobs, locks, hinges, cleaning material, blinds, letter box, down piping, latch for the gate.

· The tools you purchased were used predominately in repairing the rental property.

They all coast less than $300.

You used similar or modern version of materials to restore the property to its original and habitual living standard.

.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 40-80(2)

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Section 43-10

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Section 25-10 of the 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 Pty Ltd 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:

· the extent of the work carried out represents a renewal or reconstruction of the entirety,

· the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair',

· the work is an initial repair.

Replacement of a subsidiary part or an entirety

 TR 97/23 at paragraph 38 considers that a property is more likely to be an entirety if:

· the property is separately identifiable as a principal item of capital equipment;   

· the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises;

· the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves,

· the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.

According to paragraph 39 of the TR 97/23, property is more likely to be a subsidiary part rather than an entirety if:

· it is an integral part of some larger item of plant;

· the property is physically, commercially and functionally an inseparable part of something else.

In the case of W Thomas & Co Pty Ltd v. FC of T (1965) 14 ATD 78; (1965) 115 CLR 58, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building.

Repair or improvement

Paragraph 45 of TR 97/23 distinguishes between a 'repair' and an 'improvement' to property which one needs to consider the effect that the work done on the property has on its efficiency of function.

If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property.

Initial repair

The work undertaken is not considered to be an initial repair.

Application to your circumstances

Repairs

You were required to undertake extensive repairs to your rental property after the eviction of your tenants. The property had been maliciously damaged by the tenants and was considered inhabitable for living in. The repairs carried out restored the property to its former condition.

The work carried out does not result in a greater efficiency of function and is therefore not an improvement and is not a renewal or construction of an entirety. The work undertaken was to restore the property to its previous condition.

Accordingly, the costs are not capital in nature and are deductible under section 25-10 of the ITAA 1997.

Capital works

Division 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.

The rate of deduction for capital works for a residential rental property is 2.5% of construction expenditure over 40 years.

In your case, you have modified the fire place, replaced overhead kitchen cupboards, replaced bathroom vanity, removed the bath and installed a shower recess and upgraded the electrical wiring.

The work carried out to modify the fire place is considered to be an improvement and is not deductible under section 25-10 of the ITAA 1997.

However, the modification of the fire place replacing an overhead kitchen cupboards and bathroom vanity, installing a shower recess and upgrading the electrical wiring is a capital expense. Thus you are entitled to a deduction for capital works under section 43-10 of the ITAA 1997.

Decline in value

The replacing of the floor coverings to the toilet is capital in nature and not deductible as a repair under section 25-10 of the ITAA 1997.

However, a deduction is allowable for the cost under section 40-25 of the ITAA 1997 as the floor coverings are a depreciating asset within the definition in section 40-30(1) of the ITAA 1997. They have a limited effective life and can reasonably be expected to decline in value over the time they are used in the rental property.

Immediate deduction for depreciating asset costing $300 or less

Subsection 40-80(2) of the ITAA 1997 allows an immediate deduction for a depreciating asset costing $300 or less if the asset is used predominantly to produce assessable income that is not from carrying on a business.

If the asset was acquired on or after 1 July 2001, there are two additional tests that must be met before an immediate deduction can be claimed:

· the asset must not be one that is part of a set of assets that started to be acquired in the same income year where the total cost of the set is more than $300; and

· the asset must not be one of a number of identical or substantially identical assets that the taxpayer started to hold in an income year that together costs more than $300.

You purchased a number of tools that were predominately used to carry out repairs to your rental property.

As the tools you purchased to carry out these repairs are considered to be eligible for a decline in value deduction, they satisfy the two additional tests and each item cost less than $300. The cost of the tools can be claimed as an immediate deduction in the year you purchased the tools.

Apportion and legal ownership

When determining what proportion of income and deductions are to be returned in relation to a rental property, it is the Legal Title that is the determining factor. Taxation Ruling TR 93/32; Income tax: rental property - division of net income or loss between co-owners; reads as follows at paragraph 6

the income/loss from the rental property must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

As you are a joint owner of your rental property, deductions incurred in the process of producing rental income from an investment property must be distributed according to the legal ownership of the property. 

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