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Ruling

Subject: Income Tax- Deductions for Repairs

Question:

Are the expenditures incurred by the taxpayer for repairs in relation to a commercial rental property allowable deductions under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

This ruling applies for the following period:

Financial year ended 30 June 2011

The scheme commences 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.

The taxpayer owns a commercial rental property that has been rented for a number of years.

The property is heritage listed and all repairs must be in accordance with the heritage listing requirements.

The property is located in inner metropolitan area and is currently tenanted.

Since purchase of the premises, the front awning has been subjected to normal wear and tear along with substantial damage as a result of fire.

In the 2011 financial year, the taxpayer was required by council to repair the awning and the roof.

Sections of the awning and roof structure were burnt and rotten, and additional supports were required to the roof.

The following works were required to repair the roof and awning structure and meet council requirements:

· Replacement of roof, gutters and facia including the replacement and addition of overflow and downpipes;

· replacement of support timbers and additional support timbers from the new roof;

· modification by shortening of the roof to meet council guidelines;

· removal of original and replacement of new ceiling boards;

· replacement of electrical works in the awning, including signs; and

· painting of new awning and roof.

The design and size of the awning have been done in accordance with the heritage listing and council requirements.

The roof has not been replaced in its entirety. Only the section of the roof associated with the damaged awning has been replaced.

The roof has been restored to its original functionality with like products.

No insurance claim has been made for the damages and invoices can be provided to substantiate the works.

The tax invoice provided by the taxpayer includes the following itemised expenses incurred in fixing the awning;

· Replace the roof, gutter and flashing of awning. Add overflow pipes and replace downpipes.

· Replace burnt timber in awning structure. Replace rotten timber and add additional timber supports. Modify round corners to make shorter.

· Remove ceiling of awning and facia. Replace ceiling and facia. Seal joins.

· Paint awning ceiling and facia of awning.

· Paint gutter with bitumen and wire mesh to cover gutters.

· Remove all electrical wiring for signs and lights. New wiring for signs and new wiring for all light fittings. Supply and install all light fittings. Remove and reinstall signs. Fit timer and sensor switches.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10.

Reasons for decision

Summary

The expenditure incurred by the taxpayer in relation to a commercial rental property is of a capital nature and not an allowable deduction under subsection 25-10(3) of the ITAA 1997.

Detailed reasoning

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 meaning of repairs

The word repair is not defined in the ITAA 1997. In its context in section 25-10 of the ITAA 1997, the word repair bears its ordinary meaning. Taxation Ruling TR 97/23 states that the word repair ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

TR 97/23 refers to the case of WG Thomas & Co Pty Ltd v FC of T (1965) 14 ATD 78, wherein 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 of function rather than the exact repetition of form or material that is significant.

Paragraph 87 of TR 97/23 states the following:

What is a 'repair' for the purposes of section 25-10 is a question of fact and degree in each case having regard to the form, state and condition of the particular property and its functional efficiency when the expenditure is incurred (per Buckley LJ Lurcott v. Wakely & Wheeler [1911] 1 KB 905 at 924), and to the nature and extent of the work done. 'Repair' may involve renewal or replacement of subsidiary parts to some degree and may involve improvement but only to a minor and incidental extent.

Work done to meet requirements of regulatory bodies

Paragraph 96 of TR 97/23 states the following:

To constitute a 'repair' for the purposes of section 25-10, work done to meet requirements of regulatory bodies must satisfy the general principles and the various factors discussed in this Ruling. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible under the section. However, work done solely to meet requirements of regulatory bodies is not a 'repair' for the purposes of the section.

Capital nature

TR 97/23 indicates that expenditure for repairs to property is of a capital nature where:

· the work is an initial repair; or

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

· the work results in an improvement in the property rather than a repair.

What is entirety?

In the WG Thomas & Co case, 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.

Paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered to be a subsidiary part rather than the entirety.

Repair or improvement

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.

Paragraph 16 of TR 97/23 states that to repair property improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. 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.

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.

Conclusion

The work done on the awning involved not only the repair and replacement of the burnt and rotten timber but also the addition of extra timber supports, replacement of gutter including installation of wire mesh and flashing of awning, addition of overflow pipes and replacement of downpipes, modification of the shape of the round corner of the awning to make them shorter, replacement of the entire ceiling and facia with new materials, replacement of the entire electrical wirings for signboard and lighting fixtures for a significant number of light fittings and fitting timer and sensor switches and painting over the entire awning structure.

The design and size of the awning has changed significantly. The works done on the awning did much more than meet a need for restoration. It provided an awning having considerable advantages over the old one, including the advantage that it reduced the likelihood of repair bills in the future. The new awning is an improvement to a fixed capital asset and that its cost is a capital charge.

Therefore, the expenditure incurred by the taxpayer in relation to the work done on the awning of a commercial rental property is of a capital nature and not an allowable deduction under subsection 25-10(3) of the ITAA 1997.

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