Edited version of your written advice

Authorisation Number: 1012742327399

Ruling

Subject: Rental property expenditure

Question 1

Is the roof replacement regarded as a deductible repair?

Answer

No.

Question 2

Are you entitled to claim a capital works deduction at the rate of 2.5% for your portion of the expenditure for the roof replacement on your rental property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You and another individual purchased an investment property a few years ago. The property is being rented.

The house was constructed several several decages ago and has a tiled roof. The roof tiles have become friable with impact from the elements over a long period of time.

The roof is leaking and causing damage to the ceiling and the interior of the house.

The roof tiles are beyond being patched and repaired.

You have attempted repairs over a number of years, however the roof is so friable that to walk on any tiles sees them crack.

The roof has been assessed by a number of builders and a recommendation to replace the entire roof has been given.

Due to being in a high rated bushfire risk area it has been recommended by the builders to replace the existing tile roof with a metal roof. Such a repair would cost about the same price regardless of materials used. Replacing the roof is the only remedy to fix the cracked, perished and leaking tiles.

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 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.

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.

As highlighted in paragraph 59 of TR 97/23, if expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, such expenditure incurred on an initial repair after property is acquired is capital expenditure and is not, therefore, deductible under section 25-10 of the ITAA 1997. The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred.

Paragraph 61 of TR 97/23 states:

It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs… An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit - yielding structure. It is capital expenditure and is not deductible under section 25-10.

In your case, the roof tiles were old at the time of acquisition of the property and had become friable over a long period of time. The poor condition of the roof is not attributable to damage that occurred during the time you rented the property. As per TR 97/23, the roof replacement is regarded as initial repairs and capital in nature. Therefore no deduction is allowable 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).

In your case a deduction is allowed under Division 43 of the ITAA 1997 for the roof replacement upon completion.

Apportionment of expenses

As you are a co-owner of the property, only the relevant portion in relation to your share of ownership in the property is an allowable deduction.

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