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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012479856921

Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for repairs for the following work carried out to your rental property?

Answer

Yes.

Question 2

Are you entitled to a capital works deduction for the following work carried out to your rental property?

Answer

Yes.

Question 3

Are you entitled to claim a deduction for decline in value for the following items listed?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You own a rental property that that has been available for rent for many years.

The property has suffered wear and tear due to various tenants over the years.

You have carried out repairs to the property and replaced specific items due to disrepair, damaged or deterioration and general maintenance.

The property remains tenanted.

You have undertaken the following work to make good or remedy defects in, damage to or deterioration of the property and general maintenance as follows:

Carpet to the entry has been replaced with tiles after flooding.

The timber flooring and stairs were sanded and polished after the removal of the carpets and vinyl.

You installed a new kitchen due to wear and tear of the existing kitchen and replaced the existing upright stove and oven with a new range hood cook top and oven due to their poor condition.

The downstairs bathroom drain was blocked and you engaged plumbers to clear the shower waste that was blocked by tree roots and grout from the drain. It was established that pipes from the bathroom were not connected to the main sewer line before you purchased the property. Costs were incurred in the excavation and connecting of piping to the main sewer.

Due to the rain over time stormwater issues were experienced causing rectifications to be made to the foundations to the right side of the house. Work undertaken included raising, moving sunken concrete footings and having a deep injection of an expansive grout resin under the concrete to re support affected area of the foundations.

The front patio was in need of repair and work was carried out to replace the structural steel and restore the patio to its original condition. There were no improvements or changes to the structure of the patio.

You had a number of large dangerous trees removed as your neighbour, the local council and solicitors have been requesting them to be removed. The trees had been trimmed a number of times over the years.

The work was carried out to rectify the defects and not to improve the value of the rental property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10,

Income Tax Assessment Act 1997 subsection 40-30(1),

Income Tax Assessment Act 1997 Section 40-25,

Income Tax Assessment Act 1997 Section 40-30,

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Section 43-10

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 Pty Ltd 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:

TR 97/23 states that the word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' (Lindsay v. FC of T (1961) 106 CLR 377 at 385). Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'

Initial repair

The work undertaken is not considered to be an initial repair.

Repair or improvement

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.

Paragraph 16 of TR 97/23 states that to repair property, improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.

In your case, your property has been rented since 1993 and has suffered wear and tear due to various tenants over that time.

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

The above work carried out does not result in a greater efficiency of function and is therefore not an improvement and is not a renewal or construction of an entirety. The work undertaken was to restore the property to its previous condition.

Therefore, the above work carried out is considered to be repairs and are deductible under section 25-10 of the ITAA 1997.

Removal of trees

In your case you have owned the rental property since 1993. Since that time a number of large trees have developed on your rental property and have posed a potential danger. The problems with the trees have occurred over time whilst the property was used for income producing purposes. The trees had been trimmed a number of times over the years. It is also noted that when carrying out repairs to the downstairs bathroom drain that tree roots had been blocking the drain. Therefore, the expenditure is not considered to be an initial repair.

You engaged a tree lopper to cut down the dangerous trees.  

The removal of the trees does not result in a greater efficiency of function in the property and is therefore not an improvement and it is not a renewal or reconstruction of an entirety. The trees were removed to prevent damage and to restore the property to its previously good condition. Accordingly, the cost of removing the trees is not capital in nature and is deductible under section 25-10 of the ITAA 1997.

Repair of foundations

In your case, due to subsiding of the foundations on the right side of your rental property you had work undertaken to have deep lift injection directly beneath the perimeter wall and footings of the affected structure to improve the bearing capacity of the foundation soils and minimise the potential for further settlement.

Case V2 88 ATC 107; AAT Case 4012 (1988); ATR 3038 concerned partial underpinning of a rental property caused by excessive drying of the subsoil. It was found that the foundations were restored to their efficiency in function without the essential character of the foundations being altered. The repairs to the foundations were not capital in nature, as they did not change the nature and character of the building and as such were deductible as repairs.

Similarly in your case, the information you provided shows that the underpinning work undertaken is not a renewal or reconstruction of the entirety as only various sections of the property's foundations required underpinning. The work completed will restore the property to its former efficiency in function and would therefore not be considered an improvement to the property. The costs you incurred are for a repair and not capital in nature.

Therefore, you are entitled to claim a deduction for the expenditure incurred in repairing part of the foundation of the property.

Capital works

You have installed new kitchen cabinets due to wear and tear, replaced carpet with tiles in the entry due to flooding and replaced garage doors.

Kitchen cupboards are separately identifiable representing an entirety in themselves and the replacement of these results in an improvement or a renewal or reconstruction of an entirety. They are fixtures and therefore, a part of the building because they satisfy the 'degree of annexation' and the 'object of annexation' tests that are generally applied to determine whether there is a fixture at common law. The kitchen cupboards are not in place simply by their own weight but are fixed with the intention that they shall remain there indefinitely.

Similarly, the replacing of the carpet with tiles in the entry area and the replacing of garage doors also are considered to be a capital improvement rather than a repair.

Therefore, an immediate deduction is not available under section 25-10 of the ITAA 1997 for the replacement of kitchen cupboards and tiling of the entry and replacing of garage doors.

However, 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.

The rate of deduction for capital works for a residential rental property is 2.5% of construction expenditure over 40 years.

Therefore, you are entitled to a deduction for capital works under section 43-10 of the ITAA 1997 for the kitchen cupboards and tiling of the entry and replacing of garage doors.

Decline in value

You were required to replace the stove and oven and venetian blinds with a similar product and standard due to wear and tear over the years you rented your property.

Expenses incurred to replacing these items are capital in nature and not deductible as a repair under section 25-10 of the ITAA 1997.

However, a deduction is allowable for these costs under section 40-25 of the ITAA 1997 as new venetian blinds, oven and cook top are depreciating assets within the definition of subsection 40-30(1) of the ITAA 1997. They have a limited effective life and can reasonably be expected to decline in value over the time they are used in the rental property.

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