Edited version of private advice

Authorisation Number: 1052381512349

Date of advice: 04 April 2025

Ruling

Subject: Rental property - deductions

Question 1

Can you claim any portion of the costs you incurred in replacing the original tiles on the roof of your rental property as a deduction for repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Can you claim the total cost you incurred to replace the tiles on the roof of your rental property as a deduction for capital works in accordance with the provisions of Division 43 of the ITAA 1997?

Answer 2

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You own a rental property.

You paid the deposit on the property a few years ago.

Settlement took place a couple of months after the deposit was paid.

The dwelling is a semi-detached house.

You did not get a building inspection done on the property prior to purchase.

At the time of purchase the property appeared to be weathertight with no evidence of dampness.

Less than a year after you purchased the property several roof leaks appeared after weather events such as following heavy rain and hail, and some ongoing damp and mould issues including water staining of the ceiling. The tiled part of the roof appeared to consist of the original tiles according to the roofer who carried out minor repairs. (The rear portion of the roof is corrugated metal sheeting.)

The roofer noted that the tiles were very weak and made any roof maintenance hazardous.

In August-September your neighbour in the other half of the semi replaced their roof.

You decided to replace your tiles on your side of the roof as they appeared to be failing.

The work on the roof was completed several months ago.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

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

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 section 43-10

Income Tax Assessment Act 1997 section 43-20

Income Tax Assessment Act 1997 section 43-25

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you may deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, but not to the extent that it is capital, private or domestic in nature.

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 discusses the circumstances in which expenditure incurred for repairs may or may not be an allowable deduction under section 25-10 of the ITAA 1997.

The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. 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 (paragraph 15 of TR 97/23).

While some works may be fairly described as repairs, the expenditure will be considered capital in nature in some situations, and therefore not deductible under section 25-10 of the ITAA 1997. Expenditure incurred for repairs to property used for income producing purposes is of a capital nature where:

1. the works result in a greater efficiency of function in the property, therefore representing an improvement rather than a repair; or
2. the extent of the work carried out represents a renewal or reconstruction of the entirety, or
3. the work is an initial repair.

An improvement

An 'improvement' involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.

In your case, the replacement of the tiles of your roof would not be an improvement as it was undertaken to restore its original function of keeping water from damaging the house's interior and does not constitute more than a mere repair.

An entirety

TR 97/23 states that a thing or structure is more likely to be an entirety if it 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. The ruling states that something that is part of a building, for example, a roof or wall, is just that and no more. The building itself is the entirety.

In your case, the replacement of the tiles of your roof would not constitute an entirety, as it is merely restoring the function of a portion of your rental property.

Initial repair

If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. 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.

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. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration:

(a) existed at the time of acquisition of the property; and

(b) did not arise from the operations of the person who incurs the expenditure.

It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price reflected the need for repairs. An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit yielding structure. It is capital expenditure and is not deductible under section 25-10 of the ITAA 97.

In your case, the tiles on your property's roof needed to be replaced as they had become porous over time due to age and wear and tear, letting in rain and moisture.

You advised that the roofer was of the opinion that the tiles were the original tiles.

You acquired the property a few years ago and became aware of the deterioration of the roof in the following year.

You decided to replace the tiles when your neighbour replaced their tiles, and the work carried out on your property was completed a few months ago.

As the work done was to repair a defect existing when the property was acquired, the repair is considered an initial repair and therefore, capital in nature. As a result, you are not entitled to a deduction for the cost of replacing the tiles on the roof of your rental property under section 25-10 of the ITAA 1997.

Capital works deduction

The replacement of the tiles on your rental property is considered to be capital works for which a deduction is available under section 43-10 of the ITAA 1997.

Section 43-20 of the ITAA 1997 allows a capital works deduction on a building, or extension, alteration, or improvement.

Section 43-25 sets out the applicable rate of deduction for capital works which in your case is X%.

Therefore, you can deduct the total cost incurred in the replacement of tiles on your rental property at a rate of X% per annum.

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