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Authorisation Number: 1051295702321

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Date of advice: 17 October 2017

Ruling

Subject: Rental property repairs

Question

Are you entitled to a deduction for repairs including painting to an awning attached to your rental premises?

Advice/Answers

Yes

This ruling applies for the following period

Year ended 30 June 20xx

The scheme commenced on

1 July 20xx

Relevant facts

You purchased commercial premises that have been rented for many years.

The premises consist of a block of shops that has heavy vehicle traffic and is currently tenanted.

As a result of damages caused by general wear and tear, and more specifically, delivery trucks bumping into an awning attached to these shops, the property requires repairs works to be undertaken to an awning that was damaged and repainting the building.

The damages to the awning became a public safety concern

The property is being restored to its original condition with some modern equivalent materials such as replacing asbestos containing material with non-asbestos containing materials.

The awning will not be replaced in its entirety; trusses, steelwork and electrical materials are being retained where possible. Otherwise all of the fascia, guttering and other materials will be removed and replaced with equivalent new materials.

Total estimated costs for repairs will be approximately $xxx xxx

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Summary of decision

You are entitled to a deduction for costs incurred in repairing the awning and repainting the building to which the awning is attached.

Reasons for decision

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.

The meaning of repairs

The word 'repairs' is not defined in the ITAA 1997. In its context in section 25-10 of the ITAA 1997, the word 'repairs' bears its ordinary meaning. Taxation Ruling TR 97/23 states that the word ‘repair’ ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damaged or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

TR 97/23 refers to the case of W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR; (1965) 14 ATD 78; 1965 9 AITR 710, it was held that a ‘repair’ involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.

Capital nature

TR 97/23 indicates that expenditure for repairs to property is of a capital nature where:

What is entirety?

In the W Thomas & Co case, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building.

Paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered to be a subsidiary part rather than the entirety.

Repair or improvement

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.

Paragraph 16 of TR 97/23 states that to repair property, improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. 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.

Paragraph 45 of TR 97/23 distinguishes between a ‘repair’ and an ‘improvement’ to property which one needs to consider the effect that the work done on the property has on its efficiency of function.

Awning and repainting façade

In your case, you have a commercial property with a front awning that has been subject to wear and tear and has been damaged. Due to the age of the building the awning was in danger of collapse and becoming a hazard.

The property is being restored to its original condition with some modern materials being used to replace the asbestos containing materials. The awning is not being replaced in its entirety as trusses, steelwork and electrical material are being retained where possible.

Accordingly, the cost of replacing the awning and repainting are a repair and are deductible under section 25-10 of the ITAA 1997.

ATO view documents

Taxation Ruling TR 97/23

Other references (non ATO view, such as court cases)

W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR; (1965) 14 ATD 78; 1965 9 AITR 710

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