Edited version of your written advice

Authorisation Number: 1051360063617

Date of advice: 11 April 2018

Ruling

Subject: Deduction for repairs on your re-occupied rental property

Question 1

Are you entitled to a deduction for the X costs incurred on your property before x?

Answer

Yes

Question 2

Are you eligible for an annual write-off deduction for your property under the capital works provision for the X items before x?

Answer

No

Question 3

Are you entitled to a deduction for the decline in value for your property for the X items?

Answer

No

Question 4

Are you entitled to a deduction for the X repairs costs incurred or due to be incurred on your property done or to be done after x?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

x: date of contract to acquire the property which settled on x

contract price $x

x to x first rental tenants

x to x second rental tenants

x you re-occupied the property

Not long after you re-occupied your unit you undertook extensive repairs to the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Question 1

Summary

Deductions for the property x, are allowed for the repairs related to the period of time during which the unit was rented and the expenditure which was incurred in the same financial year.

Detailed reasoning

Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing incurred in gaining or producing your assessable income. However, you cannot deduct a loss or outgoing which is capital in nature, for example, an improvement.

Section 25-10 of the ITAA 1997 states that you are allowed 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.

The term ‘repairs’ is not defined in section 25-10 of the ITAA 1997. Taxation Ruling TR 97/23 provides the Tax Office’s view on expenditure that is allowable under section 25-10 of the ITAA 1997. It explains the circumstances in which deductions for repairs are allowable. 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 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.

● The work restores the efficiency of function of the property without changing its character.

● A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair.

● Repair work might require the use of different material to restore a previous function or efficiency of the previous function of the property and still be a repair as long as it is not an improvement providing a new and different function.

● The ruling states that repairs are capital in nature if:

● The extent of the work carried out represents a renewal or reconstruction of the entirety, or

● The works result in a greater efficiency of function in the property, therefore representing a substantial 'improvement' rather than repair. An improvement brings a thing or structure into a more valuable or desirable state of condition, or

● The work is an initial repair.

● It also states that if the work done goes beyond 'repair' and the whole cost is capital expenditure; no amount is allowable as a deduction under section 25-10 for 'notional' repair.

● Taxation Ruling IT 180 acknowledges that repairs are allowable after a rental period providing:

● that the necessity for the repairs (non capital in nature) can be related to the period of time during which the premises have been used to produce assessable income, and

● the premises have produced assessable income during the year of income in which the expenditure was incurred.

In your case we consider that the items listed in question one are meeting the criteria of repair as they are not an initial repair or improvement and were simply done to restore a previous function. These repairs were also done during the year the premises have produced assessable income.

Question 2

Summary

These items would be considered capital in nature as they are fixed to the building.

As the work was done outside the period your property was rented or was available for rent, the yearly write-off deduction is not allowable.

Detailed reasoning

Division 43 of the ITAA 1997 relates to deduction of certain capital expenditure on assessable income producing buildings and other capital works. It sets out the rules for working out those deductions

TR 97/23 states that a property is more likely to be an entirety if:

(a) the property is separately identifiable as a principal item of capital equipment; or

(b) the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or

(c) the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

(d) the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law (paragraph 38 of TR 97/23).

A property is more likely to be a subsidiary part rather than an entirety if:

(a) it is an integral part of some larger item of plant; or

(b) the property is physically, commercially and functionally an inseparable part of something else (paragraph 39 of TR 97/23).

As the replacement of an entirety is capital in nature, it is not deductible under section 25-10 of the ITAA 1997. Also, a deduction is not available under section 8-1 of the ITAA 1997 (the general deduction provision) as this provision also excludes expenses of a capital nature.

CTBR (NS) Case 109 led to a bath, a basin and a clothesline not being treated as plant. A ‘completeness test’ in relation to the whole letted property was applied by the AAT in Case 11/97 to determine what was part of the fabric of the property. It was said that if the property could not function as residential quarters without an item, then that item was integral to the property and not plant. This means that, in the case of rental properties, the function of the whole property must be considered in deciding if an item is plant and only when it is found that the item is not essential to the function of the property overall can the item be plant and then only if it can still be considered plant when taken alone.

It should be noted that the write-off deduction is allowable only for the period your property is rented or is available for rent and you cannot deduct an amount for any period before the completion of construction of the capital works.

Question 3

Summary

These items are not eligible for a deduction for the decline in value as the property is no longer rented or available for rent.

Detailed reasoning

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).

Section 40-25 of the ITAA 1997 provides a basis for writing off the capital cost of depreciating assets over their estimated effective life where the item is owned by the taxpayer and either used during the year of income or installed ready for use for the purpose of earning your assessable income. The effective life of depreciable plant was listed in Taxation Ruling TR 2016/1 and TR 2017/2.

You are allowed to choose between one of the two methods to work out the decline in value of your depreciating assets. These methods are the diminishing value method (section 40-70 of the ITAA 1997) and the prime cost method (section 40-75 of the ITAA 1997).

You may have an immediate deduction under subsection 40-80(2) of the ITAA 1997 when the total cost of an item that you started to hold in the income year does not exceed $300.

An amount can be claimed for these items when they are installed or held ready for use for producing assessable income, after reducing it by an amount for any private use.

In this case an amount cannot be claimed for these items as your property is no longer rented or available for rent.

Question 4

Summary

No deduction is allowable after the financial year you last rented your place after re-occupying it.

In addition, no capital deduction is allowable because your property is no longer used for income producing purpose. It has become your residential property.

Detailed reasoning

Taxation Ruling IT 180 acknowledges that repairs are allowable after a rental period providing that the premises have produced assessable income during the year of income in which the expenditure was incurred.

Division 43 of the ITAA 1997 relates to deduction of certain capital expenditure on assessable income producing buildings and other capital works.

The list of items under question four were not done before x and your property is no longer an income producing property.

There is no discretion available for the Commissioner to allow extra time for a taxpayer to claim a deduction for work done to your main residence that was a rental property in the previous financial year.

Therefore no deduction is allowable.

Other relevant comments

Note that if you received any payout from insurance claims in relation to these expenses it should be included as income in your tax returns.

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