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Ruling

Subject: rental property expenses - repairs

Question 1

Is the roof of a rental property considered a subsidiary part of the rental property as opposed to an entirety in itself?

Answer

Yes.

Question 2

Is the replacement of a damaged asbestos sheet roof with Colorbond steel sheeting considered a repair?

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 purchased a rental property several years ago. At the time of purchasing the property the roof was in good condition with no leaks. The property has been rented on commercial terms since you purchased it and has not been vacant at any time. You subsequently became aware that the roof was leaking. Repairs were undertaken to sections of the roof however it was clear the roof would have to be replaced in the future.

The roof continued to leak until you were advised that the entire roof would need to be replaced. The roof was further damaged by heavy rain and storms. The work to replace the roof was undertaken during the 2011-12 financial year. The work replaced the existing corrugated asbestos sheeting with Colorbond steel sheeting.

You will not be receiving any reimbursement of the expense through insurance or receiving any other monetary recovery.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

According to section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997), expenditure incurred by you for repairs to any premises, or part of premises, or a depreciating asset held or used by you solely for the purpose of producing assessable income is an allowable deduction. However you cannot deduct capital expenditure (subsection 25-10(3) of the ITAA 1997).

The word repair is not defined in the Act, and therefore bears its ordinary meaning. Lurcott v. Wakely & Wheeler (1911) 1 KB 905 states that:

Repair is restoration by renewal or replacement of a subsidiary part of a whole...the question of repair is in every case one of degree, and the test is whether the act to be done is one which in substance is the renewal or replacement of defective parts, or the renewal or replacement of substantially the whole.

There are several issues to consider in determining whether expenditure was incurred as a result of a repair, these being:

(a)  the distinction between the replacement of a subsidiary part and the replacement of an entirety

(b)  the distinction between a repair and an improvement, and

(c)  expenditure on recently acquired property.

In this case, it is necessary to consider whether the replacement of the asbestos roof as opposed to repairing it, which was not an option legally, would be considered the replacement of a subsidiary part or an entirety and whether it would actually constitute a repair or an improvement.

Question 1 - is the repaired roof a subsidiary of the entirety?

Determining what is the entirety is a question of fact in each case. According to Taxation Ruling TR 97/23, property is more likely to be an entirety if:

(a)  the property is separately identifiable as a principal item of capital equipment; or

(b)  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; or

(c)  the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

(d) the thing or structure is a 'unit of property' as that expression is used in the

depreciation deduction provisions of the income tax law.

Property is more likely to be a subsidiary part rather than an entirety if:

(a)  it is an integral part of some larger item of plant; or

(b)  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) 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.

In your case, the building is itself considered to be the entirety.  The roof would be considered a subsidiary part of the building.  This view is confirmed at paragraph 40 of TR 97/23.

Question 2 - is the replacement of a damaged asbestos sheet roof with colourbond sheeting considered a repair?

Repairs generally improve the condition of the property.  However substantial improvements, additions, alterations, modernisations and reconstructions are not repairs.  Some of the factors which indicate an improvement as opposed to a repair include :

· the modification work has effected an improvement to the asset;

· there is greater efficiency of function of the property;

· there is an increase in the value of the asset;

· the expenditure reduces the likelihood of future repairs.

According to TR 97/23, the Commissioner accepts that the use of a different material does not necessarily prevent the work from being a repair, provided the work merely restores a previous function to the property or restores the efficiency of the previous function. Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant.

It should be noted in this case that the asbestos roof could not be repaired due to the dangers of the asbestos.  Paragraph 26 of TR 97/23 discusses expenditure incurred in controlling health risks from dangerous substances.  The ruling explains that work done to a property in controlling health risks associated with the use of dangerous substances, such as asbestos, does not qualify as a repair for the purposes of section 25-10 of the ITAA 1997 unless the work remedies or makes good defects in, or damage to, or deterioration (in a mechanical or physical sense) of, the property. 

Thus the fact that a different material had to be used will not automatically mean that installing a Colorbond roof is not a repair.  To be allowable under section 25-10 of the ITAA 1997 the expense must meet the general repair requirements.

In the case of Wates v. Rowland (1952) 2 QB 12, the floor of a house had rotted from dampness and a tiled floor was installed. The new floor was held not to be an improvement but a repair. It was considered that the floor had merely been replaced by its modern equivalent.  TR 97/23 provides that if the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used.  Even if the work done using different materials enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility.

In your situation, your primary purpose in using the colour-bond roof was to remedy a damaged roof which could not be repaired due to the fact that the roof contained asbestos and could not be repaired safely.

It is considered that the Colorbond steel roof which was used in place of repairing the existing asbestos roof would constitute a repair as the change in material did not enable the property to perform its function more efficiently than previously. It could not be said that the installation of the Colorbond steel roof has improved the function of efficiency of the roof than if you had had the option of repairing the existing damaged roof. The roof has merely been repaired by its modern equivalent and restored the original function to the exterior of the property. 

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