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Edited version of your written advice
Authorisation Number: 1012763742134
Ruling
Subject: Rental property expenses - replace damaged asbestos roof with zincalume roof
Question
Are you entitled to a deduction for the cost of removing the damaged asbestos roof on your rental property and replacing it with a zincalume roof?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
You own a property that has been available for rent since you acquired it more than 10 years ago.
The asbestos roof on the property was in good condition when the property was acquired.
The asbestos roof became damaged, with the asbestos crumbling and cracking.
You incurred expenses to replace the damaged asbestos roof with a zincalume roof.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-10
Reasons for decision
You can deduct expenditure you incur for repairs to premises (or part of premises) that you used solely for the purpose of producing assessable income providing the expenditure is not capital in nature (section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).
Expenditure is considered to be capital in nature where the work undertaken goes beyond a repair and becomes an improvement.
In the case of a repair, broadly speaking, 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. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.
If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property.
Replacement or substantial reconstruction of the entirety, as distinct from the subsidiary parts of the whole, is an improvement.
If expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue.
Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant.
If the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. However, the greater the work enhances the efficient functioning of the property the more likely it is that the work constitutes an improvement.
The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility.
In your case you have removed and replaced a damaged asbestos roof with a zincalume roof. The roof is a subsidiary part of a whole; the whole being the building itself, and therefore the roof is not an entirety.
The use of zincalume to replace the asbestos roof constitutes a repair as the change in material is not considered to have improved the efficiency or function of the roof. The asbestos roof has merely been repaired using a modern equivalent and the new zincalume roof has simply restored the original function. As such, the expenditure is not capital in nature.
Therefore, you are entitled to a deduction for the cost of removing and replacing the damaged roof on your rental property under section 25-10 of the ITAA 1997.
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