Edited version of private advice

Authorisation Number: 1051998418055

Date of advice: 23 June 2022

Ruling

Subject: Allowable deductions - capital allowances and repairs

Question 1

Are the expenses in Table 1 considered repairs and allowable deductions under section 25 of the Income Tax Assessment Act (ITAA) 1997?

Answer

Yes.

Question 2

Are the expenses in Table 2 considered depreciable assets under section 40-25 of Income Tax Assessment Act 1997?

Answer 2

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 February 20XX

Relevant facts and circumstances

You have a short term rental property at xxxx, which was purchased in xxxx.

On the xxxx your rental agent advised of possible water leaks in your ensuite and bathroom of the property.

On the xxxx the property was inspected by a licensed plumber (xxxx) who confirmed there was an issue with the tiling which was failing.

To remedy the problems, on advice from the plumber, both the bathroom and ensuite tiles required relaying which meant a complete guttering of both rooms.

Both rooms were retiled, water proofed and reconstructed to the exact same layout as previous with the same facilities which did include new shower screens and vanities as the old ones could not be salvaged as part of guttering.

You have incurred the following expenses in the year ended 30 June 20XX

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25

Income Tax Assessment Act 1997 Section 40-25

Reasons for decision

General deductions

Under section 8-1 of ITAA 1997 you can deduct for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are of a capital, private or domestic nature.

You have rental income and can claim certain rental expenses as a deduction.

Deductions for repairs and maintenance

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.

Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction.

The term 'repair' means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. 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 or dilapidated.

Repair costs are 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.

If you are preventing or fixing deterioration of an item that occurred while renting out your property, this is likely to be maintenance. For example, getting faded interior walls repainted or having a deck re-oiled. This should be claimed at the Repair and Maintenance area on the rental schedule of your tax return.

In your case, the property was rented during the period you incurred the expenses. We are satisfied that the expenses listed in Table 1 are repairs and maintenance items involved in remedying the water damage of both the bathroom and ensuite, to restore the efficiency and function of both rooms to their former state and form and are therefore allowable deductions under section 25 of the Income Tax Assessment Act (ITAA) 1997.

These are the expenses you have incurred that would qualify as repairs and maintenance.

Decline in value (Capital Allowances)

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that can reasonably be expected to decline in value over time it is used (section 40-30 of ITAA 1997)

Depreciating assets are those items that can be described as plant, which do not form part of the premises. These items are usually: separately identifiable; not likely to be permanent and expected to be replaced within a relatively short period and not part of the structure. Examples of assets that deductions for decline in value can be applied to include timber flooring, carpets, curtains, appliances like a washing machine or fridge and furniture

The expenses listed in Table 2 are of a capital nature are not deductible as repairs or maintenance. These items include fixtures and fittings, along with items which we would also deem as improvements. Whilst they are not deductible as repairs or maintenance, these items can be claimed as a depreciable asset as outlined in section 40-25 of the ITAA 1997.

Immediate deduction for depreciating assets costing $300 or less

The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it to produce assessable income, including rental income, during the income year in which the deduction is available.

The immediate deduction is available if all of the following tests are met in relation to the asset:

•         it cost $300 or less n you used it mainly for the purpose of producing assessable income that was not income from carrying on a business (for example, rental income where your rental activities did not amount to the carrying on of a business of letting rental properties)

•         it was not part of a set of assets costing more than $300 that you started to hold in the income year, and

•         it was not one of a number of identical, or substantially identical, assets that you started to hold in the income year that together cost more than $300.

Therefore, the expenses listed in Table 2 that are below $300 can be claimed as an immediate deduction.

These are the expenses you have incurred that fall into these categories.

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