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Edited version of your private ruling
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Ruling
Subject: Rental property expenses - repairs
Question
Are repairs to your rental property undertaken in the 2011-12 financial year to rectify damage caused by white ants an allowable deduction?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You have owned a rental property for a number of years. The property was leased as commercial premises until the business became unviable, at which point the property was rented as a residential property.
Subsequently a section of the ceiling collapsed. When it was being repaired it was discovered the damage had been caused by white ants. The damage caused by the white ants was then found to have spread through the walls, floor and roof joists and floor boards of the upper part of the property. Those items were all replaced. In order to rectify the damage the bathroom tiles, fixtures and fittings were also replaced and associated electrical and plumbing work was performed.
The affected areas listed above were repaired using similar materials to the original. No improvements to the fixtures or fittings were undertaken. Pest extermination was also undertaken.
The tenants remained in the property during the repairs.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10
Reasons for decision
Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for non capital expenditure incurred on repairs to plant or premises held or used for producing assessable income.
The word 'repair' is not defined within the tax legislation. Accordingly, it takes its ordinary meaning. Repair involves a restoration of a thing to a condition it formerly had without changing its character.
Taxation Ruling TR 97/23 also provides that a 'repair' involves making good defects, damage or deterioration. It includes the renewal of parts but the term does not imply a total reconstruction. What is a 'repair' for the purposes of section 25-10 of the ITAA 1997, is a question of fact and degree having regard to the form, state and condition of the particular property and its functional efficiency when the expenditure is incurred and to the nature and extent of the work done. A 'repair' may involve some improvement but only to a minor and incidental extent.
A renewal, as distinguished from repair, is reconstruction of the entirety, meaning not necessarily the whole but substantially the whole. The courts in considering repair cases have interpreted the term 'entirety' to be something separately identifiable as a principal item of capital equipment.
Work done to a part of a property, though not amounting to a replacement or reconstruction of an entirety, may still amount to an improvement and be capital expenditure and not deductible.
The work done on the white ant damaged joists, floorboards and wooden walls and replacement of tiles and bathroom fixtures and fittings is a restoration to the former state. There is no change to the function of these items, and there is therefore no improvement to the property.
In summary, the expenditure incurred by you is considered repairs and is not capital in nature. The expenditure is therefore allowable as a deduction under section 25-10 of the ITAA 1997.
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