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Edited version of your written advice

Authorisation Number: 1012819482410

Ruling

Subject: Rental Property Expenses

Question

Can any portion of the costs you incurred in redesigning and replacing the roof of your rental property be claimed as a repair deduction?

Answer

No

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

On or after 1 July 20XX

Relevant facts

You acquired a house shortly after it was built.

While the house was being rented out there was a severe weather event with high levels of rain falling.

During this period of heavy rain, rain water entered the house causing damage.

Investigations showed that this was due to faults in the design and construction of the roof.

You were unable to claim on your insurance or claim compensation for the problem with the roof.

To rectify the design and construction problem you had with the roof you increased the pitch of the roof with the use of extra battens and used one length of roofing to cover the whole span.

This work has been completed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 43-10

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you may deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, but not to the extent that it is capital, private or domestic in nature.

Section 25-10 of the 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.

Taxation Ruling TR 97/23 discusses the circumstances in which expenditure incurred for repairs may or may not be an allowable deduction under section 25-10 of the ITAA 1997.

The word 'repair' is not defined within the taxation legislation.  Accordingly, it takes its ordinary meaning. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time (paragraph 15 of TR 97/23).

While some works may be fairly described as repairs, the expenditure will be considered capital in nature in some situations, and therefore not deductible under section 25-10 of the ITAA 1997.

Expenditure incurred for repairs to property used for income producing purposes is of a capital nature where:

An improvement

An 'improvement' 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.

In your case, the replacement of your roof would be an improvement as it was undertaken to improve its original function and design specifications to a higher standard of keeping water from damaging the house's interior in a greater range of weather events which it had failed to do, and therefore constitutes more than a mere repair.

Initial repair

If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. 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.

The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration:

(a) existed at the time of acquisition of the property; and

(b) did not arise from the operations of the person who incurs the expenditure.

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 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 of the ITAA 97.

In your case, the roof on your property needed to be rebuilt as it was faulty, letting in rain during heavy downpours. You acquired the property and became aware of the problem with the roof when during a period of heavy rain the roof failed to keep the water out.

The fault in the roof existed when you acquired the property.

The work done on the roof was both to make an improvement to the property and also to repair a defect existing when the property was acquired and for the reasons set out above it is considered to be capital in nature.

As a result, you are not entitled to a deduction for the cost of replacing the roof of rental property under section 25-10 of the ITAA 1997.

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