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Edited version of your written advice

Authorisation Number: 1012983468286

Date of advice: 11 March 2016

Ruling

Subject: Rental repairs

Question 1

Are the following works regarded as deductible repairs:

Answer

Yes.

Question 2

Are you entitled to a deduction for the decline in value for the Solar hot water system in your rental property?

Answer

Yes.

Question 3

Are you entitled to a repairs deduction for the remainder of the work carried out on your rental property?

Answer

No.

Question 4

Are you entitled to claim a capital works deduction for the remainder of the work carried out on your rental property?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts

You purchased a rental property in 20XX.

Since purchase it has been consistently rented via a Rental Agency.

The property became vacant in 20XX as the lease was not renewed due to the tenants non-payment of rent.

During the time the property was tenanted it had been neglected by the occupants.

The property was deemed untenantable at the time it was vacated due to disrepair and you sought quotes in order to bring the property back to a tenantable standard.

When work started it was found that there was more damage than initially seen and this required you borrowing additional funds to complete the work that was required to the house.

The bathroom, kitchen and patio had extensive work done on it.

Minor work was conducted on various areas inside and outside the house.

The cost of all of this work amounted to $XX,XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Division 40

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 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. A repair restores the efficiency of function of the property without changing its character.

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 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. That is, where work done to a property goes beyond what is a repair, any expenditure for the work is not deductible.

In your case you have owned and rented the property for several years, therefore the work is not regarded as initial repairs.

The work done in the laundry, the replacement of the internal doors and security screens, the internal repainting, the replacement of the soakwells, down pipes and gutters, the repairing of the reticulation and maintenance done to the garden are regarded as deductible repairs under section 25-10 of the ITAA 1997 as these items were not replacing an entirety.

Depreciating assets

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).

Solar hot water systems 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.

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 you have had the entire kitchen and entire bathroom and the entire patio replaced. The extensive amount of work carried out goes beyond being a repair and amounts to an improvement. The associated expenses are capital in nature and not deductible repairs under section 25-10 of the ITAA 1997.

You have also incurred expenses for replacing the electrical wiring. Items wired and fixed to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997. These expenses are incurred for items that do not go beyond being part of the setting of an income producing operation. The items form a permanent part of the fabric of the building and are considered to be capital works for Division 43 purposes. The expenditure for the rewiring is capital expenditure for which a deduction is allowable under section 43-10 of the ITAA 1997 at the rate of 2.5%.

Further information for you to consider

For further information on how to calculate your allowable depreciation deduction, please refer to the Australian Tax Office's Guide to depreciating assets which is available on the website www.ato.gov.au.

Please note, that as the property is jointly owned, the allowable deductions are apportioned according to your legal ownership.

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