Edited version of your written advice

Authorisation Number: 1013084006970

Date of advice: 9 September 2016

Ruling

Subject: Rental expenses

Question 1

Are you entitled to an immediate deduction for the full amount of the expenses incurred in repairing your investment property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Are you entitled to an immediate deduction for the expenses incurred for the air-conditioner cover replacement, windows being replaced, blinds replaced, carpet replaced, laminate flooring boards, replacement of doors and the repainting of your investment property?

Answer

Yes

Question 3

Are you entitled to claim a deduction for decline in value for the oven and gas heater for your investment property?

Answer

Yes

Question 4

Are you entitled to claim a capital works deduction for the refitting of the kitchen and bathroom of your investment property?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You own an investment property that you have rented.

You had tenants damage the property significantly in 20XX.

You have repainted the walls due to damage.

You replaced the air-conditioner cover.

You replaced the vinyl in the kitchen dining with laminate boards, due to the vinyl being damaged and torn.

You have removed the stained and damaged carpet and will be replacing the carpet in all the rooms.

You replaced the kitchen in its entirety, including new appliances and oven due significant damage.

You replaced the entire bathroom with new tiles and fittings, due to significant damage.

You replaced the gas heater due to being unable to repair.

You replaced the damaged blinds throughout the house.

You fixed the broken windows.

You replaced the broken doors.

You are currently seeking tenants to rent out the property once the maintenance works have been completed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Subsection 25-10(3)

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Subsection 40-25(7)

Income Tax Assessment Act 1997 Subsection 40-30(1)

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Subsection 43-25(1)

Income Tax Assessment Act 1997 Subsection 43-30

Reasons for decision

Where work performed amounts to a repair it is deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997). However, expenditure for repairs will not be deductible if the expenditure is found to be of a capital nature. Subsection 25-10(3) of the ITAA 1997 precludes a deduction for capital expenditure.

Replacement of air-conditioner cover, windows, blinds, carpet, laminate flooring boards, doors and the repainting of your investment property

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out, damaged or dilapidated.

Example 8 of TR 97/23 where a factory owner replaced a bitumen floor with a new concrete floor, established that the new floor, from a functional efficiency point of view, is not superior in quality to the old floor. The new floor performs precisely the same function as the old and is no more satisfactory. Therefore it is considered a repair and its cost is deductible under section 25-10 of the ITAA 1997.

You are entitled to a deduction for the work carried out on the property, including the repainting of walls, replacing windows, carpet, laminate floor boards and the replacement of the air-conditioner cover, as these do not provide any substantial improvement, they simply restore functionality without changing its character. These expenses are deductible under section 25-10 of the ITAA 1997 as they constitute a repair.

Oven and gas heater

Some of the factors that are considered in distinguishing between an improvement rather than a repair include a greater efficiency of function, improvement or replacement in entirety. Where the works amount to a substantial improvement, addition or alteration it is not a repair and is not deductible under section 25-10 of the ITAA 1997.

Where an item is not an allowable deduction as a repair and it is considered capital in nature, a decline in value deduction is allowed for depreciating assets. Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose. Taxable purpose is defined in subsection 40-25(7) of the ITAA 1997 to mean for the purposes of producing assessable income.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997). Where decline assets cost $300 or less, you are entitled to an immediate deduction to the extent that you used it for a taxable purpose.

You are entitled to a decline in value deduction for the purchase of the items oven and gas heater as they are depreciating assets. As you have replaced them as an entirety and they are an improvement, they are considered to be beyond a repair and are not an allowable deduction under section 25-10 of the ITAA 1997.

Kitchen and bathroom

Expenditure on a thing or structure that is a renewal, replacement or reconstruction of the entirety is an improvement rather than a deductible repair. An improvement 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. As it is beyond a repair it is not an allowable deduction under section 25-10, the improvement in the entirety is considered to be capital in nature.

Division 43 of the ITAA 1997 allows a deduction for capital expenditure incurred in constructing capital works, including building and structural improvements, where a residential property is used for income producing purposes. The deduction is available on the cost of constructing structural improvements or extensions, alterations or improvements to structural improvements if construction started after 26 February 1992.

ATO Interpretative Decision 2003/222 establishes the Commissioners view regarding the distinction between repairs and capital expenses. In this decision it was determined that the replacement of kitchen cupboards in a rental property were capital in nature.

You are entitled to a capital works deduction for the restoration of the kitchen and bathroom. The bathroom and kitchen are considered to be separate identifiable capital items, with their own function they are therefore an entirety in themselves. Their replacement is a renewal of an entirety and the expenditure is not deductible as a repair under section 25-10 of the ITAA 1997. The expenditure is capital in nature therefore you are entitled to a capital works deduction.

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