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Edited version of private advice

Authorisation Number: 1012683876460

Ruling

Subject: Repairs

Question

Are you entitled to a repairs deduction for a portion of the cost of replacing the tiles that relate to the income producing use of your property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You rent out a room of your home. The room is advertised at market rates.

You don't provide meals for your guests, however, they have access to the kitchen, living room and bathroom.

The guest's room and common areas are approximately 50% of your property.

You started to use your home for rental income more than two years ago.

You purchased the property approximately five years ago.

In 20XX the tiles in one of the common use rooms were replaced. The tiles were in good condition at the time of purchase.

Some of the tiles were chipped and damaged. The tiling adhesive was deteriorating, causing other tiles to pop or lift.

Some of your guests expressed concern about the safety hazard of the chipped tiles.

You were unable to source the original tiles which were more than 25 years old.

The tiler recommended a full replacement of the tiles in the room as other tiles would continue to lift and chip.

The new tiles are similar to the previous tiles.

You incurred costs for the associated labour of removing the damaged tiles and putting in new tiles.

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 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 Income tax: deductions for repairs 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:

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.

In your case the replacement of the tiles are not considered to represent a renewal or reconstruction of an entirety and nor are they considered to be an initial repair. However whether the work constitutes an improvement must be considered.

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.

In your case, the tile replacement used similar material to what was previously there. The floor is restored to its original condition, function and appearance. The work is not regarded as an improvement. The expenditure incurred is regarded as a repair for section 25-10 of the ITAA 1997 purposes.

Apportionment of expenses

As the room is used by yourself as well as the tenants, you will need to apportion the expenses using a reasonable basis. Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to a deductible purpose. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances.

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