Edited version of private advice

Authorisation Number: 1052363392581

Date of advice: 18 February 2025

Ruling

Subject: Rental deductions

Question 1

Are the expenses incurred for painting the interior considered a deductible repair under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Are the expenses incurred for removing the carpet and sanding the floor considered a deductible repair under section 25-10 of the ITAA 1997?

Answer 2

No.

Question 3

Are the expenses incurred for repairing the adjacent property's fence considered a deductible repair under section 25-10 of the ITAA 1997?

Answer 3

No.

Question 4

Are the expenses incurred for repairing and replacing various light fittings, ceiling wires, switches, ceiling fans considered a deductible repair under section 25-10 of the ITAA 1997?

Answer 4

No.

Question 5

Are the expenses incurred for pool and garden maintenance deductible repairs under section 25-10 of the ITAA 1997?

Answer 5

No.

Question 6

Are the expenses incurred for repairing the pool up to compliance considered a deductible repair under section 25-10 of the ITAA 1997?

Answer 6

No.

Question 7

Are the expenses incurred for replacing the X hot water system considered a deductible repair under section 25-10 of the ITAA 1997?

Answer 7

No.

Question 8

Is the cost of the microwave immediately deductible under section 40-80 of the ITAA 1997?

Answer 8

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The taxpayers purchased The Property in joint names.

The taxpayers engaged with a property manager to rent out the Property on the date of settlement and to list the property for rent.

The pre-inspection building and timber pest report found existing minor defects with the Property on external and internal areas

The taxpayers' solicitor also advised that the pool was non-compliant with council regulations and cannot be rented until it has been certified for compliance.

The property agent took prospective tenants to inspect the Property but none were interested in proceeding to rent the Property due to the property's disrepair.

The Property was then taken off the market for rent to undertake remediation works to bring the Property up to rentable condition and increase rental yield before putting the Property on the market for rent again approximately X months later.

The property was rented out from approximately a week after listing onwards.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 subsection 25-10(3)

Income Tax Assessment Act 1997 subsection 40-25(1)

Income Tax Assessment Act 1997section 40-30

Income Tax Assessment Act 1997 section 40-80

Income Tax Assessment Act 1997 subsection 40-80(2)

Reasons for decision

Question 1

Are the expenses incurred for painting the interior considered a deductible repair under section 25-10 of the ITAA 1997?

Summary

No, the cost of painting the interior is not a deductible expense under section 25-10 of the ITAA 1997 as it is an initial repair which is a capital expense, and is therefore excluded under subsection 25-10(3) of the ITAA 1997.

Detailed reasoning

Section 25-10 of the ITAA 1997 states:

25-10 Repairs

(1)           You can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income.

Property held or used partly for that purpose

(2)           If you held or used the property only partly for that purpose, you can deduct so much of the expenditure as is reasonable in the circumstances.

No deduction for capital expenditure

(3)           You cannot deduct capital expenditure under this section.

Taxation Ruling TR 97/23 Income Tax: deductions for repairs (TR 97/23) contains the commissioners view in relation to the operation of section 25-10 of the ITAA 1997 and the meaning of the word 'repairs'.

The word 'repairs' has its ordinary meaning, which is to 'remedy or make good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

Expenditure incurred on an initial repair after the property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition is capital expenditure, and therefore subsection 25-10(3) of the ITAA 1997 prevents a deduction for such expenses. A repair is not an 'initial repair' simply because it is the first repair made after the property is acquired.

It is immaterial whether the taxpayer knew of the condition of the property at the time of acquisition, or whether the purchase price reflected the need for expenses to be incurred to repair the property.

The leading case authority for this is W Thomas & Co Pty Ltd v. FC of T (1965) 115 CLR 58 at 72, where Windeyer J stated:

...when a thing is bought for use as a capital asset in the buyer's business it is not in good order and suitable for use in the way intended, the cost of putting it in order suitable for use is part of the cost of its acquisition, not a cost of its maintenance.

Application to your circumstances

In this case, the repainting repaired existing deterioration of internal paint work at the time the property was acquired. Therefore, the works are initial repairs and capital in nature, and are not a deductible expense.

Question 2

Are the expenses incurred for removing the carpet and sanding the floor considered a deductible repair under section 25-10 of the ITAA 1997?

Summary

No, the cost of removing the carpet and sanding the floor is not a deductible expense under section 25-10 of the ITAA 1997 as it is an initial repair which is a capital expense, and is therefore excluded under subsection 25-10(3) of the ITAA 1997.

Detailed reasoning

Please refer to detailed reasoning for Question 1.

Question 3

Are the expenses incurred for repairing the adjacent property's fence considered a deductible repair under section 25-10 of the ITAA 1997?

Summary

No, the cost of repairing the adjacent property's fence is not a deductible expense under section 25-10 of the ITAA 1997 as it is an initial repair which is a capital expense, and is therefore excluded under subsection 25-10(3) of the ITAA 1997.

Detailed reasoning

Please refer to detailed reasoning for Question 1.

Question 4

Are the expenses incurred for repairing and replacing various light fittings, ceiling wires, switches, ceiling fans considered a deductible repair under section 25-10 of the ITAA 1997?

Summary

No, the cost of repairing and replacing various light fittings, ceiling wires, switches, ceiling fans is not a deductible expense under section 25-10 of the ITAA 1997 as it is an initial repair which is a capital expense, and is therefore excluded under subsection 25-10(3) of the ITAA 1997.

Detailed reasoning

Please refer to detailed reasoning for Question 1.

Question 5

Are the expenses incurred for pool and garden maintenance deductible repairs under section 25-10 of the ITAA 1997?

Summary

No, the cost of pool and garden maintenance is not a deductible expense under section 25-10 of the ITAA 1997 as it is an initial repair which is a capital expense, and is therefore excluded under subsection 25-10(3) of the ITAA 1997.

Detailed reasoning

Please refer to detailed reasoning for Question 1.

Question 6

Are the expenses incurred for repairing the pool up to compliance considered a deductible repair under section 25-10 of the ITAA 1997?

Summary

No, the works done to the pool to ensure it complies with council regulations is not deductible under section 25-10 of the ITAA 1997 as the works do not fit within the ordinary meaning of a repair. The removal of the plant overgrowth is an initial repair and is excluded under subsection 25-10(3) of the ITAA 1997 as it is a capital expense.

Detailed reasoning

Work done to meet requirements of regulatory bodies must still satisfy the general principals and factors of the meaning of 'repair' as discussed in TR 97/23 in order to be deductible under section 25-10 of the ITAA 1997.

Repair does extend to a removal of any impediment to the holding of property for income purposes arising solely from regulatory requirements as it demonstrates that the property is otherwise functioning as intended and is not in a state of disrepair.

Paragraph 99 of TR 97/23 provides an example where work done to comply with a government requirement is not deductible as it does not remedy or make good any defect, damage or deterioration in a mechanical or physical sense.

Additionally, TR 97/23 also notes that works done to meet requirements are likely to be excluded from deduction under section 25-10 if they involve capital expenditure, such as initial repairs.

Application to your circumstances

The expenses incurred in works done to the pool to make it compliant with council regulations are not deductible under section 25-10 of the ITAA 1997. The increase in fencing height for the pool does not fit within the meaning of a 'repair' as explained in TR 97/23 as it does not remedy or make good any defect, damage or deterioration in a mechanical or physical sense. TR 97/23 also notes at the example in paragraphs 165-167 that the replacement of the entirety of a fence is not deductible under section 25-10 of the ITAA 1997 as it is capital in nature.

Question 7

Are the expenses incurred for replacing the X hot water system considered a deductible repair under section 25-10 of the ITAA 1997?

Summary

No, the cost of replacing the X hot water system is not a deductible expense under section 25-10 of the ITAA 1997 as it is a capital expense, and is therefore excluded under subsection 25-10(3) of the ITAA 1997.

Detailed reasoning

Section 25-10 of the 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 for repairs to property is capital expenditure. If the expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety, then it is capital expenditure.

The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' (Lindsay v Federal Commissioner of Taxation [1961] HCA 93).

Property is more likely to be an entirety, as distinct from a subsidiary part, if:

•                     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 can provide 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 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.

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 the 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.

Application to your circumstances

The X hot water system can be described as plant and is a depreciating asset. Therefore, the cost of replacing the system is not deductible under section 25-10 of the ITAA 1997. However, you may be able to claim a deduction for the decline in its value whilst the property is being used to produce income.

Question 8

Is the cost of the microwave immediately deductible under section 40-80 of the ITAA 1997?

Summary

Yes, the microwave is considered a depreciating asset under Division 40 of the ITAA 1997. As the cost of the microwave was under $300 and the expense was incurred in the financial year that rental income was earned, the expense is immediately deductible under subsection 40-80(2) of the ITAA 1997.

Detailed reasoning

Subsection 40-25(1) of the ITAA 1997 states:

(1)           You can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a depreciating asset that you held for any time during the year.

Section 40-30 of the ITAA 1997 provides that 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 except land, trading stock or some intangible assets. Depreciable assets are those items that can be described as plant, that don't form part of rental property premises. These items are usually:

•                     separately identifiable

•                     not likely to be permanent

•                     such that replacement of the item will occur within a relatively short period

•                     not part of the structure of the building.

Subsection 40-80(2) of the ITAA 1997 states:

Depreciating assets used for certain purposes

(1)           The decline in value of a * depreciating asset you start to * hold in an income year is the asset's * cost if:

(a)           that cost does not exceed $300; and

(b)           you use the asset predominantly for the * purpose of producing assessable income that is not income from carrying on a * business; and

(c)           the asset is not one that is part of a set of assets that you started to hold in that income year where the total cost of the set of assets exceeds $300; and

(d)           the total cost of the asset and any other identical, or substantially identical, asset that you start to hold in that income year does not exceed $300.

Application to your circumstances

In these circumstances, the microwave was purchase for the rental property in the financial year in which it was used to produce income. The microwave is a depreciating asset under Division 40 of the ITAA 1997. The expense is immediately deductible as the conditions in subsection 40-80(2) of the ITAA 1997 are met, namely that the cost did not exceed $300 and the microwave was used predominately for the purpose of producing assessable income.

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