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Edited version of your private ruling
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Ruling
Subject: Rental property expenses
Question 1
Are you entitled to a deduction for repairs for work done to the staircase?
Answer
Yes
Question 2
Are you entitled to a deduction for decline in value of the replacement hot water system?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts and circumstances
You own a rental property and replaced a broken hot water system as well as having extensive work carried out to a staircase.
You replaced the existing hot water system with one which uses an alternate energy source, because new regulations for your state prevent the replacement of an existing system in an area where the newer form of energy is available.
You purchased the property over eight years ago, and lived in it for approximately three years.
The property has been available for rent or rented for over five years.
The building inspection report at the time of purchase stated that a minor part of the stairs required repair.
You have rental property entry condition reports dated since then which do not indicate any problems with the staircase or hot water system.
The property is managed by an agent who was notified by the tenants of the need to repair the stairs.
A quote for repairing the stairs is to replace the stairs using similar material as the original, and to refit the handrail.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1 and
Income Tax Assessment Act 1997 Section 25-10.
Reasons for decision
Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states expenditure incurred by you for repairs to premises used by you for the purpose of producing assessable income is an allowable deduction. However, a deduction is not allowable if the expenditure is of a capital nature.
Taxation Ruling TR 97/23 provides the Tax Office's view on repairs that are allowable under section 25-10 of the ITAA 1997 and 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 work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or
· the work is an initial repair.
The work undertaken to the staircase is not a renewal of the entirety, is not an improvement, nor an initial repair, and so is considered to be a repair to the rental property and therefore you are entitled to a deduction.
Depreciation
Under section 40-25 of the ITAA 1997 you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you hold. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time that it is used.
The replacement of the original hot water system with one which uses a different energy source is not considered to be in the nature of an improvement; aside from the government regulations, you were merely replacing it with a modern equivalent which was possibly not available at the time the original system was installed.
The replacement hot water system is considered to be plant. It is a depreciating asset for which a decline in value deduction can be claimed. Therefore, you are entitled to a deduction for its decline in value under Division 40 of the ITAA 1997.
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