Edited version of private advice

Authorisation Number: 1052131725412

Date of advice: 21 June 2023

Ruling

Subject: Rental deductions

Question 1

Is the work carried out on the roof a repair and therefore an immediate deduction?

Answer

Yes.

Question 2

Is the replacement of the ceilings on the internal rooms a repair and therefore an immediate deduction?

Answer

Yes.

Question 3

Is the electrical and plumbing work considered capital works?

Answer

Yes.

Question 4

Is the replacement of electrical items and plumbing items along with the arial considered depreciating assets?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a rental property several years ago.

You are the sole owner of the property.

The property was available for rent as soon as you purchased it.

The property was managed by a real estate agent.

Prior to purchase a verbal building inspection was completed by an associate with no defects reported.

A pest inspection was also obtained and no defects were reported.

Tenants moved in immediately on settlement.

Inspections of the property were completed by the managing agent, with no issues flagged by either agents or tenants.

In the following year the tenant reported an issue whereby the ceiling appeared to be sagging.

The area where the property is located had experienced a number of damaging weather events in previous months.

A builder and gyprocker were engaged to carry out repairs.

It was found that there were safety issues with gang plates used on roof trusses, that had contributed to damage.

Additional timber trusses had to be installed to support existing timber trusses.

As part of this process existing roof tiles were removed.

In addition, roof antenna, electrical items & plumbing had to be removed and/or disconnected.

Upon removing the ceiling, a number of additional issues were identified.

Work commenced to repair the roof and replace the damaged ceiling. This included removing existing 'blow-in' insulation, removal of roof tiles & antenna, disconnection of plumbing and electrical items, removal of ceilings in several rooms, and crane hire for lifting in additional truss support. Replacement of plumbing & electrical items, along with roof tiles and insulation etc, were required.

All work carried out was to restore the roof & ceilings to a safe & habitable state only. No additional construction or improvements were made.

Tax invoices for all costs have been supplied by the client and are available to be sighted if required.

The tenants moved out during the repair process.

The property was available for rent at all times.

New tenants moved in shortly after the repairs were completed.

The property was insured.

You did not make an insurance claim as you were told it would not be successful as not one event alone had caused the damage.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 43-30

Income Tax Assessment Act 1997 section 43-140

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 word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co v. FC of T (1965) 115 CLR 58, 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.

Taxation Ruling TR 97/23 Income tax: deductions for repairs deals with the issue of deductions for repairs.

TR 97/23 provides that expenditure for repairs to property is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of the entirety (paragraphs 36-42), or the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair' (paragraphs 44-58).

Taxation Ruling TR 97/23 states:

•                     Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

•                     To repair property improves to some extent the condition it was in immediately before 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.'

An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' (Lindsay v. Federal Commissioner of Taxation (1960) 106 CLR 377 at 385).

Property is more likely to be an entirety, as distinct from a subsidiary part, if (TR 97/23):

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

•                     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

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

•                     the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.

Division 43 of ITAA 1997 provides for a system of deducting capital expenditure incurred in the construction of buildings and other capital works used to produce assessable income.

Section 43-30 of the ITAA 1997 provides that you cannot deduct any amount for a period before the construction is complete.

Section 43-140 of the ITAA 1997 sets out the way you must use your area in an income year for a deduction to be allowed under section 43-10 (the main deduction provision). The relevant use depends on the time when the capital works began (Column 1) and the type of capital works (Column 2).

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 4030 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.

Immediate deduction for depreciating assets costing $300 or less.

Where a depreciating asset costs less than $300 you are able to claim an immediate deduction rather than depreciate the asset over a period of time where the asset has been used for income producing activity.

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

•                     it cost $300 or less and 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 that are below $300 can be claimed as an immediate deduction.

Roof:

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'.

As such, work carried out on a roof would not generally represent a renewal or a reconstruction of an entirety (as the house would be classed as the entirety).

Where a property is used for income producing purposes and the work carried out on the roof:

•                     is not an initial repair,

•                     is not an improvement,

•                     the material for the new roof is the same or very similar as the old roof, and

•                     the repair work does not result in a greater efficiency of function, such that it represents an improvement rather than a repair of the roof,

a deduction is allowable under section 25-10 of the ITAA 1997 (as long as those roof repairs can be separately identified where a roof is being repaired as part of an overall upgrade to a property).

The work carried out on the roof is considered to be a repair.

Replacement of ceilings

Replacement of the ceilings in the internal building is considered to be a repair and an immediate deduction for the expense associated with this is allowable.

Electrical work and plumbing work

The electrical work and the plumbing work are considered to be capital and an immediate deduction is not allowable. You are able to claim a capital works deduction.

Electrical items, plumbing items and arial

The electrical items, plumbing items and the arial are all depreciating assets.

Taxation Ruling 2022/1 (TR 2022/1) considers the effective life of depreciating assets. The ruling sets out the effective life of the above assets.

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