Edited version of private advice

Authorisation Number: 1051534326783

Date of advice: 22 July 2019

Ruling

Subject: Rental property maintenance

Question 1

Are you eligible to claim an immediate deduction for replacing the stumps of your rental property?

Answer

No

Question 2

Are you eligible to claim an immediate deduction for replacing the decking boards and supporting beams of your rental property?

Answer

No

Question 3

Are you eligible to claim an immediate deduction for replacing the gyprock in all areas excluding the laundry of your rental property?

Answer

No

Question 4

Are you eligible to claim an immediate deduction for replacing the tiles on the walls and floor, due to the removal of the blue board in your rental property?

Answer

No

Question 5

Are you eligible to claim a capital works deduction for the cost of replacing:

The stumps of your rental property;

The decking boards and supporting beams of your rental property;

The gyprock in all areas excluding the laundry of your rental property;

The tiles on the walls and floor due to the removal of the blue board in your rental property?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You own a property which has been rented out for the last three years.

The property is rented as part of a private arrangement, to friends of friends.

The property is rented weekly at the market rate.

The property was your main residence from the purchase date for 12 months, up until it was rented.

It was rented up until the time the repair work was carried out.

As the work has not yet been completed, the property was unable to be rented until very recently, when you have found a tenant who is willing to occupy the property while work is undertaken, in return for a reduced rate of rent.

A relative is a builder and is doing some of the work as well as organising the tradespersons for you.

You found that almost all of stumps of the house needed replacing.

The stumps were RHS steel, and were replaced with the same product.

At the same time, due to movement, the house was not level.

You also had a moisture issue in the bathroom and decided to repair a leak.

When you commenced removing the wall lining in the bathroom it was discovered the moisture issue was also in other house walls.

You then removed all lining to see how far the moisture issue went.

All walls except bathroom and laundry were gyprock and were replaced with gyprock. The bathroom was blue board and was replaced with blueboard.

The laundry was gyprock and was replaced with blueboard.

The bathroom was retiled once sheeting was completed.

The deck was also affected by moisture from the garden and grounds.

The gardens were removed; the underneath of the decking board was rotten. It was all replaced with the same product.

The pre purchase Building Inspection Report indicated the condition of many aspects of the property you addressed after purchase.

In 'property description'

"The property has recently been renovated, and in some areas the quality of this renovation is below par and not at a level of quality workmanship. As advised by the agent, the significant rear deck addition is not a completed class 1 or 10 structure and no formal building approvals were lodged to construct it."

Page 3 Inspection Summary

Some major Defects:

• Detachment of lounge ceiling linings from framing member's supports, and the condition of the isolated pier steel column footings in the subfloor - will be detailed more in the relevant report category.
• Property was occupied, moderately/highly furnished, and partially renovate, but substandard workmanship in some areas. Overall the average condition of the property in all areas is fair.
• Timber pest inspection also carried out.
• Fence shortcomings noted, trees noted.
• Some loosened window seals noted.
• Deck posts embedded directly into concrete.

Page 14

Some steps had deteriorated due to service life and exposure to the elements.

Exterior cladding - gaps visible in connections between some exterior cladding material and windows/doors.

Page 15

Some rubber window seals have loosened.

Paragraph 5.2.5

The deck at the rear side is non-compliant in several areas, without building approvals. Timber posts are directly into the ground. The non-invasive testing methods used showed some materials in service showing signs of deterioration and in need of replacement.

Page 20

Paragraph 6.1

Major defects - many rusting box section steel house columns within the subfloor which were showing signs of being badly corroded........not in good condition....immediate rectification work recommended...Tilting and failing

Minor defects -

Bolts/nuts, bearer joints,

Page 22

Moisture meter placed on blemishes on flooring below wet areas, no positive moisture meter readings were recorded. Warning was stated against taking this as a sign that there were no current leaks. Only further invasive inspection techniques and monitoring of the area in question, during occupation, could determine this. There were however obvious signs of material deterioration. In all cases relating to wet area seepage, regardless of the moisture meter not reacting positively, the recommendation was made that client immediately engages an appropriately licensed QBCC contractor to arrange for an invasive inspection to be carried out, as only this level of inspection can fully determine the actual extent of damage to materials in this area, whether or not there is a current leak(s) or not and any rectification work and costs required to any issue identified during an invasive inspection. The recommendation to suggest further investigation is made to exercise and meet a Duty of Care legal obligation.

It is not uncommon to find such deterioration, particularly in older homes caused by leaks or spillages, due to their service life.

Page 20

Paragraph 6.3

"Materials in subfloor area, particularly in view of the steel columns, as being in a Poor-Fair condition, rectification work will be necessary in some areas."

Interior inspection - from page 26/27

Some hairline cracks in plaster, cornice. Average 2mm.

Some binding/sticking doors.

Some squeaky flooring under covering.

Many cracked floor tiles, some chipped, missing grout in joints.

Some of the floor tiles are drummy.

Some uneven timber floor levels were observed, related to movement in steel columns.

Page 29

Most floorcoverings are tile.

Most wall linings are plasterboard.

Ceiling linings are plasterboard

Bathroom has single vanity, tiled shower and separate dual flush toilet

One single mechanical ventilation, works, but very noisy.

Page 30

Because the residence was occupied and very heavily furnished in some areas, there were accessability issues with some areas, there were many concealed sections of floors, walls, skirting boardsand architraves.

Bedrooms in particular were inaccessible.

Page 31

Roof space

There was considerable separation of many ceiling battens in the ceiling void away from their framing supports. Immediate rectification was recommended due to worst case scenario of risk of collapsing of ceiling linings.

Page 35

Roof exterior - No major or minor defects noted.

Page 49

There were no positive moisture readings on moisture stains, and further investigation was recommended.

Page 52

Health and Safety issues

No handrails for some stairs

The inspection document stressed that non-destructive inspection was carried out, and indicated where further investigation was recommended, for instance moisture stains.

The above work was carried out and paid for in the 20XX and 20XX income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Summary

A deduction is allowed for the cost of repairs to premises used for income producing purposes; however where the condition was in existence at the time of purchase, the expense is considered to be capital in nature.

Detailed reasoning

Section 25-10 of theITAA 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 denies a deduction for repairs where the expenditure is of a capital nature.

The meaning of repairs

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a 'repair' involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.

Initial repair

Paragraph 59 of TR 97/23 states that expenditure incurred on an initial repair after a rental property is acquired, where the expenses are incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. This is so whether the property is purchased or obtained under lease or licence by the taxpayer.

The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred.

Paragraphs 60 and 61 of TR 97/23 state that the main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Where expenditure remedies damage, defects or deterioration to the property which existed at the time of purchase of the property and did not arise from the income producing activity, the expenditure is capital in nature.

It is not considered material whether you were aware of the condition or the need for repair of the property at the time of purchase. Expenditure on initial repairs lacks a connection to the income producing activities of the property and is considered an additional cost of acquiring the property or an improvement in the quality of the property you acquired.

The pre-purchase inspection made note of the need for the work that you are having carried out.

In your case we have determined that you cannot claim a deduction under section 25-10 of the ITAA 1997 for the cost of these works. The initial inspection report noted extensive repairs and renovations were necessary to bring the property back to its former condition.

Where expenditure remedies damage, defects or deterioration to the property which existed at the time of purchase of the property and did not arise from the income producing activity, the expenditure is capital in nature. The work carried out to the property is considered to be an initial repair as it did not arise from the income producing activity and was there when you purchase the property.

Repair costs are only deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

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).

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).