Edited version of private ruling

Authorisation Number: 1011601966255

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Ruling

Subject: Rental property

1. Are you entitled to an immediate deduction for the following work carried out to your rental property

· replacing light fittings

· replacing telephone points?

Yes.

2. Are you entitled to an immediate deduction for the following work carried out to your rental property

· replacing damaged carpets

· replacing damaged curtains with venetian blinds

· replacing a stove?

No.

3. Are you entitled to claim a deduction for decline in value for replacement of carpets, venetian blinds and a replacement stove?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You purchased your property ten years ago and lived in the property until you commenced renting the property.

The most recent tenancy of your rental property commenced in around two years ago on a twelve month lease.

Your tenants vacated the property after seven months with very little notice. The following work was undertaken to rectify damage to the property caused by the tenants:

· replaced the carpet throughout the rental property due to water damage in the hallway from a leaking pipe and also the poor condition of the carpet from tenants carelessness

· replaced the curtains with venetian blinds throughout the rental property

· replaced light fittings in the house and telephone points

· replaced the damaged stove.

The work was carried out until new tenants were found.

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 40-30.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

You are not entitled to an immediate deduction for the purchase of carpets, venetian blinds and a stove as they are depreciating assets for which you can claim a deduction for decline in value. However, you are entitled to an immediate deduction for the replacing of light fittings and telephone points as they are considered repairs.

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. 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 meaning of repairs

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.

TR 97/23 explains (at paragraph 16) that to repair property, improves to some extent the condition it was in immediately before the 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 the following expenses are capital in nature and not deductible under section 25-10 of the ITAA 1997:

· replacement of an entire structure or unit of property

· improvement and renovating, and

· initial repairs, for example fixing defects that existed when you purchased the property.

What is entirety?

Paragraph 38 of TR 97/23 explains that a property is more likely to be an entirety if:

· 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.

Improvement

While a repair restores the efficiency of the function of the property without changing its character, an improvement goes beyond this and provides a greater efficiency of function in the property. An improvement usually brings the property into a more valuable or desirable form or condition than a repair would and generally changes the character of the property.

However, different materials may be used to repair the property, for instance, repairing a property with its modern equivalent. A repair refers to the restoration of efficiency rather than the exact repetition of form and materials previously used. An improvement involves more than merely using a different material, it must also give a better result.

Immediate deduction items

The light fittings in the property and telephone points in the main bedroom and lounge room were damaged and required replacing.

The work done does not result in greater efficiency of function and is not a renewal of an entirety. These items are considered repairs and are deductible under section 25-10 of the ITAA 1997.

Decline in value

The carpets, venetian blinds and stove are regarded as depreciating assets and no immediate deduction is allowable under section 25-10 of the ITAA 1997 for the replacement of these items.

However, section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income.

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 (subsection 40-30(1) of the ITAA 1997).

In your case, you have had to replace all the carpets and a stove as they were damaged by the tenants. You also replaced the curtains in the property with venetian blinds. You are entitled to a deduction for the decline in value of these items.