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Ruling

Subject: Rental property work

Question 1

Are you entitled to an outright deduction for the costs incurred for the following work to your property

· removing and fixing partitions,

· replacing a door to a cupboard in foyer area,

· replacing ceiling panels,

· fixing front entrance canopy and doors,

· removing loose vinyl floor tiles,

· replacing air-conditioning registers, and

· cleaning and painting?

Answer

Yes.

Question 2

Are you entitled to claim a deduction for capital works for the costs incurred for replacing the electrical wiring, power points and light switches?

Answer

Yes.

Question 3

Are you entitled to a deduction for the decline in value for the light fittings?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You owned a rental property. The property had been owned and leased for many years.

The previous tenant did not renew their lease after leasing for several years. They left in late 2010.

The tenant removed part of their fit out and abandoned the remainder.

In late 2010 you obtained quotes to have work carried out on the property in preparation for a new tenant. The work commenced in late 2010 and was completed and invoiced in the 2010-11 financial year.

The work included

· removal of the tenant's abandoned fit out and partitions,

· patching and fixing the remaining partitions,

· replacing electrical wiring, power points and light switches,

· new light fittings,

· replacing a door to a cupboard in foyer area,

· replacement of ceiling panels and lights damaged by tenant, reusing the existing ceiling suspension system,

· fixing front entrance canopy and doors,

· removing loose vinyl floor tiles,

· cleaning and painting, and

· installing new air-conditioning registers in the ceiling, (the existing ducting and support brackets were used).

All ceiling panels in the main area were replaced. Most of these ceiling panels were damaged. The remaining panels had been in place for several years and were also replaced in the main area. However, only some of the ceiling panels were replaced in the kitchenette and bathroom area.

Most of the air-conditioning registers were damaged from the tenants putting the partitions over the registers.

All electrical wiring was replaced as the existing wiring was unsafe.

You paid the invoice in the 2011-12 financial year.

You sought leasing options and appraisals with a real estate agent. You pursued several lease negotiations for several months. You received written offers from interest parties, draft leases by solicitors and council zoning investigations and searches. However all negotiations failed, primarily due to council zoning for permissible use.

You were advised to seriously consider sale options as leasing negotiations were becoming protracted and financially unviable, due to the large incentives being sought in a very depressed commercial property market.

In late 2011 you were forced to sell the office due to the financial and emotional stress. The sale contract settled in late 2011.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

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 held or used for income producing purposes, to the extent that the expenditure is not capital in nature.

In your case, your tenant moved out in late 2010 and you had been trying to find a new tenant. You sold the property in late 2011.

The deductibility of repairs to a property carried out after the cessation of income is specifically addressed in Taxation Ruling IT 180. As highlighted in paragraph 2 of IT 180, the Commissioner states that if repairs are affected and paid for after the property had ceased to be rent producing, then the expenditure was not to premises held, occupied or used for the purposes of producing assessable income.

 IT 180 paragraph 4 states that the cost of repairs to a property after it stops being used to produce assessable income may be deductible providing: 

(a) the necessity for the repairs can be related to a period of time during which the premises have been used to produce assessable income of the taxpayer, and

(b) the premises have been used in the production of such assessable income of the year of income in which the expenditure was incurred.

Both the above conditions are required before a deduction is allowable.

In your case, the necessity for the work relates to the period the property was leased and from damage from the tenant. You also received assessable rental income for some months in the 2010-11 income year. As both conditions are met, a deduction is allowable for the repairs to the property.

We now need to consider whether all the work carried out is regarded as a deductible repair.

Repairs

Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

TR 97/23 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 works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or

· the work is an initial repair. 

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.

You have incurred expenses for the following work on your rental property:

· removing the necessary partitions and fixing other partitions,

· replacing damaged ceiling panels,

· replacing damaged air-conditioning registers,

· repairs to front cupboard door and front entrance,

· removing loose vinyl floor tiles,

· cleaning and painting.

The above items are not considered to be capital in nature. You have incurred these expenses to restore your property to a rentable state. Therefore you are entitled to a deduction for the associated repairs.

Capital works

Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

Section 43-10 of the ITAA 1997 requires that:

· the capital works have an area in which capital works is carried out, the work is begun after 30 June 1997, and the expenditure incurred is for capital works that are owned or leased by the taxpayer (section 43-75 of the ITAA 1997);

· there is an amount of construction expenditure incurred that is attributable to the capital works area (section 43-85 of the ITAA 1997); and

· the construction area must be used in a deductible way at some time during the year of income for the purposes of producing assessable income.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997).

You have incurred expenses for replacing the electrical wiring and switches. Items wired and fixed to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997. These expenses are incurred for items that do not go beyond being part of the setting of an income producing operation. The items form a permanent part of the fabric of the building and are considered to be capital works for Division 43 purposes. Such expenditure is capital expenditure for which a deduction is allowable under section 43-10 of the ITAA 1997 at the rate of 2.5%.

Depreciating assets

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose.

Lights are regarded as a depreciating asset for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction where they are used for income producing purposes. For details on how to calculate the allowable depreciation deduction, please refer to the Australian Tax Office's Guide to depreciating assets which is available on the website www.ato.gov.au.

Please note these items are regarded as capital expenditure and therefore not deductible as repairs under section 25-10 of the ITAA 1997.

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