Edited version of private ruling

Authorisation Number: 1011483197589

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Ruling

Subject: Rental deductions

Question

Are you entitled to a deduction for the cost of the reconstruction of the patio at your rental property?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You have owned an investment property for many years.

The house has an attached wooden patio.

Recently your tenants alerted you the patio was unsafe and moving.

You contacted a local carpenter to inspect the patio. On their recommendation you had them dismantle the structure and reconstruct a new one using similar materials. This cost approximately $X,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10.

Income Tax Assessment Act 1997 Subsection 25-10(3).

Reasons for decision

Summary

The reconstruction of the patio is considered a repair to the rental property and therefore you are entitled to a deduction.

Detailed reasoning

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.

Subsection 25-10(3) of the ITAA 1997 precludes a deduction for repairs where the expenditure is of a capital nature.

The word 'repair' is not defined within the tax legislation. Accordingly, it takes its ordinary meaning. 'Repair' involves a restoration of a thing to a condition it formerly had without changing its character (W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710).

Taxation Ruling TR 97/23 deals with deductions for repairs. According to paragraph 16 of TR 97/23, to repair is 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.

Whether work constitutes a repair depends on the facts of each case having regard to the appearance, form, state and condition of the particular property at the time of the expense, and to the nature and extent of the work done.

A repair may also be capital expenditure if it is an initial repair, that is, where the repair remedies some defect or makes good damage or deterioration to the property which existed when the property was acquired and does not arise from the operations of the taxpayer who incurs the expenditure.

In the following circumstances repairs are capital in nature and not deductible: 

- where the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or

- where the extent of the work carried out represents a renewal or reconstruction of the entirety.

In your case, the rental property's patio had deteriorated over time and was deemed unsafe by your local carpenter. You had the old patio demolished and constructed an entirely new patio using similar materials.

The reconstruction of the patio is not a replacement of an entirety, as the patio is considered only part of the building (it is not separate to the building and is not capable of providing a useful function without regard to any other part of the premises); and it is not an improvement, as similar materials were used and the work simply restores the property to a condition of good working order.

Therefore, the reconstruction of the patio is a repair to the rental property and the cost is deductible under section 25-10 of the ITAA 1997.