Edited version of private advice

Authorisation Number: 1051795444160

Date of advice: 11 January 2021

Ruling

Subject: Rental property expenses - initial repairs

Question 1

Are you entitled to an immediate deduction for the entire amount of the expenses incurred for the work done to the roof?

Answer

No.

Question 2

Are you entitled to an immediate deduction for a portion of the expenses incurred for the work done to the roof?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased a property in XXXX which is used for income producing purposes. The property was built more than XX years ago.

During a property inspection carried out in XXXX it was detected that there was a leak in the ceiling of the bathroom.

You engaged a tradesman to patch the leak however after several attempts the leak continued. The tradesman suggested having the roof inspected.

You engaged a roofer to inspect the roof. You were provided with a quote which stated the roof could not be repaired and was required to be replaced.

On XXXX work was undertaken to replace the roof. You incurred expenses in the amount of XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

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, no deduction is allowable where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) provides the Commissioner's view on the deductibility of repairs. 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.

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

•         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 an 'improvement' rather than 'repair', or

•         the work is an initial repair.

An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' (Lindsay v. FC of T (1961) 106 CLR 377 at 385). Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'.

TR 97/23 uses the expression 'initial repair' to describe a repair that remedies defects, damage or deterioration of property:

a)    in existence when the property was acquired, and

b)    not arising from the operations of the taxpayer who incurs the repair expenditure.

Initial repairs are capital in nature.

In your case, the works done to the roof were undertaken to make good damage or deterioration which merely restored the efficiency and function of the property and did not change its character. The works are therefore correctly characterised as 'repairs'.

The costs of the repairs will be fully deductible only if they involve the remedying of defects, damage or deterioration wholly attributable to the period in which the property was held by you for income producing purposes.

The property you acquired was built more than XX years ago and the condition of the roof when you purchased it indicated the property still had the original roof on it.

Given the age of the roof, it is considered that much of the deterioration of the roof would have already been in existence when you acquired the property. Therefore, at least some of the works carried out are considered to be initial repairs and you are not entitled to an immediate deduction for the full cost of the repairs.

However, an initial repair expense can be dissected or apportioned to allow a deduction under section 25-10 of the ITAA 1997 for any part of the expense that remedies deterioration arising from the holding of the property for income purposes after it was acquired.

In most cases it is the Commissioner's view that dissection or apportionment on a time basis is the most appropriate method of dissection or apportionment. However, in your circumstances it is considered reasonable to allow a deduction of XX% of the costs to repair the roof as we acknowledge that the roof would have continued to deteriorate during your ownership.

The balance of the repair expenditure is considered to be capital works as your initial repair is a structural improvement. Division 43 of the ITAA 1997 allows a deduction for capital works in relation to a structural improvement to a residential rental property where the structural improvement was constructed after 26 February 1992. The rate of the deduction is 2.5% over 40 years.

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