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Ruling

Subject: Rental property expenses

Question 1

Can you claim a deduction for the following costs incurred in relation to your rental property after cessation of rental income?

Answer

Yes.

Question 2

Can you claim a deduction for the following costs incurred in relation to your rental property after cessation of rental income?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You jointly own a rental property which was rented out from 2002 until late 2011. A few weeks prior to the last tenants vacating, you moved into the house.

The house has an upstairs and downstairs living area.

An air conditioner required servicing and a replacement part, as it was not working correctly.

The ceiling in the lounge had a large crack running along it, and a new ceiling was installed. This was after consultation with the plasterer, who recommended that the whole ceiling be replaced, as there were too many patch ups to be done, and there could be no guarantee that the cracks would not reappear. Costs for repairing the cracks and replacing the ceiling were virtually similar.

The whole interior of the house was painted, as it had not been painted for a number of years during the time it had been rented.

The original television antenna was replaced, as it was not working.

Each of the side fences were falling over and required replacement.

The gas heater needed servicing and parts. The repairs were done a few months after you moved back in.

There were rubbish tip charges for disposal of rubbish.

The clothesline had to be replaced.

All light globes, whether working or not were replaced with more energy efficient globes.

Clips for air conditioning vents, garden hoses and house numbers were replaced.

A new heater was installed in the downstairs lounge and bedroom area.

Indoor blinds were fitted on all windows, replacing vertical and venetian blinds which were broken. You had been advised that they were not repairable.

New outdoor shutters were fitted to some bedroom windows, not as replacements.

Large trees in the front and back yard were removed as the roots were affecting concrete areas, inhibiting lawn growth, and to enable the pergola to be rebuilt.

The existing pergola was structurally unsafe, and didn't provide adequate shelter from the elements. It was replaced.

The original paving under the pergola was lifting and unsafe, and was replaced.

A new water tank was installed.

A motor was installed on the roller door, enabling it to be operated remotely.

The kitchen, bathroom and laundry were completely renovated, as tiles were lifting, the oven didn't work, floor tiles were cracked and couldn't be cleaned adequately.

All white goods were replaced.

All lounge and bedroom carpet was replaced, as the carpet was grubby and threadbare.

Flywire security doors were replaced with security doors.

New lights were fitted to replace broken units in the downstairs lounge room after the ceiling was replaced.

White stones were put on dead garden beds.

The rubbish that was removed the day after you moved in to the house was paving, concrete and shrubs that had been taken out prior to the replacement of the dilapidated pergola.

The other rubbish removals in various months were ongoing rubbish left by tradesmen.

The home was let fully furnished, and you also took the opportunity to get rid of furniture which was worn out and unable to be repaired.

The tenants had the house cleaned, and you then had it cleaned again to a higher standard.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10,

Income Tax Assessment Act 1997 Subsection 40-25(7),

Income Tax Assessment Act 1997 Section 25-10 and

Income Tax Assessment Act 1997 Subsection 40-30(1).

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.

The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58); (1965) 14 ATD 78; (1965) 9 AITR 710, 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 in function rather than the exact repetition of form or material that is significant.

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

Repair is distinct from renewal or replacement

Renewal, replacement, or reconstruction of, the whole or substantially the whole of a thing or structure ('entirety') is likely to be considered a capital improvement rather than a deductible repair.

 What is an entirety?

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

  deduction provisions of the income tax law.

Improvement or repair

When work is done to restore or 'fix' a damaged item, we need to determine if the work undertaken is a 'repair' or an 'improvement'. Repairs generally restore the item to its former function and efficiency whereas improvements increase an item's functionality and/or efficiency.

 A repair may increase the items efficiency slightly and still be classed as a repair. However, where the item's function or efficiency is improved substantially or the work changes the function of the item, the work is considered to be an improvement and capital in nature.

The cost of repairs to a property after cessation of income producing use is covered in Taxation Ruling IT 180. Paragraph 4 of IT 180 states that a deduction may be allowed for the cost of repairs to property providing:-

In your case the property had been income producing from 2002 to late 2011.

The following work to the property relates to the period the property was income producing. Also the property was used to produce assessable income in the year in which the expenditure was incurred.

The works listed above do no more than restore the property to its original condition. They do not materially alter the character or functionality of the property, and will restore the existing functionality of the property without changing the original character.

The fact that these repairs were carried out after the property had ceased to produce assessable income does not alter your entitlement to claim a deduction for the cost of the repairs. Therefore, the expenditure incurred in relation to the repairs is considered to be an allowable deduction under section 25-10 of the ITAA 1997.

Service and repair gas heater

While it is accepted that the heater may have been worn, as the repair was carried out a few months after the tenancy ceased, it is considered that the need for the repairs to the gas heater relate to the period after the property was income producing. That is, the repairs relate to the period while you were living in the house and is a private expense and not deductible.

Replace light globes which were still working

The light globes that were still working were replaced with a more efficient type. Their replacement is considered to be of the nature of an upgrade, as they did not need replacing.

Please note the light globes which were not working and were replaced with energy efficient globes will be allowable as a repair as they were replaced with the modern equivalent of the original globe.

Capital expenses

Under Division 43 of the ITAA 1997 you can deduct certain capital expenditure on buildings used to produce assessable income. Section 43-10 of the ITAA 1997 operates to allow a deduction for an amount of capital works used in a deductible way during the income year.

The following items are considered to be capital improvements.

Expenditure incurred for repairs is not deductible under section 25-10 if the expenditure is of a capital nature. TR 97/23 states that expenditure for repairs to property is capital expenditure if the expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety.

The replacement of the kitchen, bathroom and laundry is considered to be a reconstruction of the entirety and is capital in nature.

Replacing the pergola, clothesline, paving and landscaping, security doors, and a new water tank is considered to be capital expenditure.

Tree removal to enable the pergola to be built

You removed trees to enable the pergola to be rebuilt.

At paragraph 94, TR 97/23 states that work done that is only in anticipation of forthcoming defects or deterioration does in fact cease to be repair work. Work done in anticipation of forthcoming defects or deterioration can be considered a repair only if it is done in combination with work of rectification. In your case the removal of the trees was not done in combination with work of rectification. Rather, it was done to allow you to construct a new pergola.

Therefore the removal of the trees is considered to be a capital expense.

In your case, you carried out the capital works on your rental property after the income producing function of the property had ceased. You are therefore not entitled to a deduction for the capital works as the property is no longer available for rent.

Decline in value (depreciation)

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997). 

The following items have an effective life:

However, as these were installed after the income producing function of the property had ceased, you are not entitled to a deduction for the decline in value.

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