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Edited version of your written advice

Authorisation Number: 1012948042933

Date of advice: 2 February 2016

Ruling

Subject: Rental expenses - Repairs

Question 1

Are you entitled to a repairs deduction for your share of the cost of the following work done to your rental property:

Answer

Yes.

Question 2

Are you entitled to a capital works deduction for your share of the cost of:

Answer

No

Question 3

Are you entitled to a decline in value deduction for your share of the cost of:

Answer

No

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased an investment property.

The property has been rented out from 20VV until 20YY.

The property suffered wear and tear.

You have arranged repairs and installation of the following items:

You moved into the property once the repairs were 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 40-25

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 43-25

Income Tax Assessment Act 1997 Section 43-30

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

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. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. Therefore, to qualify for a deduction under section 25-10 of the ITAA 1997 the expenditure must:

You can claim a deduction for certain expenses incurred for the period the property is rented or is available for rent. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes.

You may still be considered to hold a rental property for income purposes at the time of the repair even if it is vacant at that time. The cost of repairs to a property after cessation of income producing use is described in Taxation Ruling IT 180. Paragraph 4 of IT 180 states that a deduction may be allowed for the cost of repairs to the property providing:

In your case, it can be seen that the necessity for the repairs can be related to a period during which the property was used to produce assessable income and was used in the production of assessable income of the year of income in which the expenditure was incurred.

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:

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.

Question 1

The repairing and painting of walls, and the repair to the hot water service 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.

Question 2

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, the costs of the work and improvements to toilet suites, sinks, taps and fittings, and replacement shower screens are capital in nature. Items fixed to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997 and a capital works deduction is allowed where they are used for income producing purposes

In your case, the property is no longer used for income producing purposes as you now reside in the property. Therefore, a capital works deduction is not allowed for the toilet suites, sinks, taps and fittings, and replacement shower screens.

Question 3

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose.

A depreciating asset is an asset that has a limited effective life and can be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997).

Blinds and curtains, fans and light fittings, dryers, washing machines cooktops and rangehoods are regarded as depreciating assets for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction where they are used for income producing purposes.

In your case, the property is no longer used for income producing purposes as you now reside in the property. Therefore a decline in value deduction is not allowable under section 40-25 of the ITAA 1997.

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