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Ruling

Subject: Rental property expenses

Question 1

Are you entitled to an immediate deduction for your share of the special levy which was raised to paint the exterior of your unit block?

Answer

No.

Question 2

Is the expense of your share of the special levy raised to paint the exterior of your unit block able to be claimed as a capital works deduction?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You are the sole owner of a rental property unit.

A special levy was raised by the body corporate to paint the exterior of the unit block shortly after you purchased it.

Your property was been tenanted from the date of purchase until the end of the financial year.

The main reason for painting the outside of the building was to make it a more appealing colour for prospective tenants, and this has been shown to be effective from the high level of rent you have been able to maintain in a less than favourable rental market.

You were aware of the intention to paint the exterior of the building and that a levy would be raised for this work when you purchased your unit.

The condition of the paint when you purchased the unit was not badly deteriorated, but the colour was not considered to be very good.

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 43-10 and

Income Tax Assessment Act 1997 Section 110-25.

Reasons for decision

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. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 discusses the circumstances in which expenditure incurred for repairs may or may not be an allowable deduction under section 25-10 of the ITAA 1997.

The word 'repair' is not defined within the taxation legislation.  Accordingly, it takes its ordinary meaning. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time (paragraph 15 of TR 97/23).

While some works may be fairly described as repairs, the expenditure will be considered capital in nature in some situations, and therefore not deductible under section 25-10 of the ITAA 97. Expenditure incurred for repairs to property used for income producing purposes is of a capital nature where:

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

· the extent of the work carried out represents a renewal or reconstruction of the entirety, (this does not apply as the repainting is neither a renewal or reconstruction of the entirety) or

· the work is an initial repair.

(this does not apply as the repainting is not a repair. The existing paint had not deteriorated to the extent that it had to be repainted for maintenance purposes: it was done to improve the appearance of the property)

An improvement

An 'improvement' involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.

In your case, repainting your rental property is considered an improvement as it was done to improve the appearance of the property, and has also enhanced its market value.

Subsection 43-20(1) of the ITAA 1997 applies to capital works being a building, or an extension, alteration or improvement to a building.

The repainting of the outside of the building is considered to be a capital improvement rather than a repair. This is because the paint colour was changed solely to result in a benefit in the look and value of the property. As the work undertaken is considered to be a capital improvement, an outright deduction is not available under either section 25-10 or section 8-1 of the ITAA 1997.

Paintwork is not plant and a decline in value deduction is not allowable.

However, as the repainting is a capital improvement to the building, a 2.5% capital works deduction is allowable.

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