Edited version of your private ruling

Authorisation Number: 1012506747220

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Ruling

Subject: rental property repairs

Question 1

Are you entitled to a deduction for the following costs incurred on your rental property:

§ Fixing the damaged part of the main bathroom floor, walls and windows

§ replacing and retiling damaged floors and walls

§ removing white ant damaged shed

§ removing white ant infested trees

§ fixing door frames, floor boards and external walls

§ refitting skirtings and hanging doors

§ fixing cracked and exposed stonework

§ replacing damaged wooden rafters, purlins and roof at the rear of the house

§ replacing the damaged pergola

§ replacing the damaged rear and side fence

§ painting

§ rubbish removal and

§ white ant treatment?

Answer

Yes.

Question 2

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

Answer

No.

Question 3

Are you entitled to claim a capital works deduction for the following expenditure incurred on your rental property:

· new external bathroom

· new shower screens and bathroom fixtures and

· additional downpipes?

Answer

Yes.

Question 4

Are you entitled to a deduction for demolishing the existing bathroom and pergola on your rental property?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description.

The relevant documents are:

§ the application for private ruling dated certain date.

§ additional information received on certain date.

You have a rental property. The property was rented for several years.

A building inspection was carried out at the time of purchase. No specific pest inspection was done at the time of acquisition of the property. At the time of purchase there was no sign of white ant problems.

The property became infested with white ants which caused structural damage to the property.

The tenants were forced to vacate the property as it became dangerous in certain areas. The property also had moisture damage arising from an overflow of gutters.

The property has timber frames, wooden roof trusses and wooden floors. The white ants destroyed door frames, timber flooring, timber supports in the ceiling and roof joists.

As a result, the following work was carried out:

§ rebuilding the entire external bathroom,

§ rebuilding part of the main bathroom,

§ replacing ceiling supports,

§ replacing white ant damaged walls,

§ removing white ant damaged shed,

§ removing white ant infested trees from the property,

§ removing rubbish,

§ repairing door frames, floor boards and external walls,

§ demolishing the white ant infested bathroom area,

§ retiling the walls and flooring in the bathrooms affected by white ants after work was carried out on the walls and flooring and

§ replacing rear and side fences.

The above work was carried out and paid for in the 2011-12 income year.

You continued to have work done to the property in the 2012-13 income year.

The following work was paid for and/or carried out in the 2012-13 income year:

§ fixing cracked and exposed stonework on stonewall,

§ demolishing and removing existing timber pergola and building a new timber pergola (the pergola is attached to the rear of the house),

§ fixing floorboards, refitting skirtings and hanging doors,

§ replacing damaged shower screens with a similar type, (the shower screen was damaged when the bathroom walls were demolished as a result of the white ant damage),

§ replacing damaged bathroom fittings, including shower arm and shower head,

§ painting,

§ white ant treatment,

§ replacing wooden rafters and purlins at the rear of the house and reroofing rear section of roof, replacing roof joists,

§ installing extra downpipes,

§ replacing wooden windows in both bathrooms and

§ fixing doors, flushing walls, hanging doors,

The property was re-rented in mid 2013 and an amount of rent was received in mid 2013.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Repairs

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, to the extent that the expenditure is not capital in nature.

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. 

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

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.

It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, 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.

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.

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 residential 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).

Bathroom and capital works

The bathroom is a separately identifiable capital item with its own function. As a consequence, it is an entirety in itself and its replacement is a renewal of the entirety. The expenditure is capital in nature and not a deductible repair (Lindsay v Federal Commissioner of Taxation (1960) 106 CLR 377; 12 ATD 197; (1960) 8 AITR 99). However the expenditure is regarded as construction expenditure for which a deduction is available under Division 43 of the ITAA 1997.

Therefore the costs of the new external bathroom are capital in nature. Also the costs of bathroom fittings such as the shower screens are permanent fixtures to the property and are capital in nature. Similarly the installation of additional downpipes represents an improvement and is therefore capital in nature. Such expenses are not deductible as repairs. However a capital works deduction is allowed under Division 43 of the ITAA 1997.

Painting, rubbish removal, fence and repairs

Fixing the damaged floors, walls, windows, fences, door frames, skirting, stonework, roof and replacing the pergola are considered to be deductible repairs. That is, this work is not regarded as capital in nature and is regarded as normal maintenance expenditure. Therefore a deduction is allowable under section 25-10 of the ITAA 1997.

he removal of rubbish and trees, painting and white ant treatment are also allowable deductions for the maintenance of your rental property.

Demolishing costs

Demolishing work is capital in nature and not a repair. Therefore no deduction is allowable under section 25-10 of the ITAA 1997.

Subsection 43-70(2) of the ITAA 1997 excludes certain expenditure from 'construction expenditure'. Expenditure on demolishing existing structures is so excluded (paragraph 43-70(2)(b) of the ITAA 1997). Therefore no deduction is allowable under Division 43 of the ITAA 1997 for the associated costs.

No other provision is relevant in relation to the demolishing costs, therefore no deduction is allowable.

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