Edited version of private ruling

Authorisation Number: 1011637491085

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Rental property expenses

1. Are you entitled to claim a deduction for the costs of the following repairs to your rental property?

· replace roof and guttering

· replacing damaged walls, ceilings and doors

· painting of interior and exterior of house?

Yes.

2. Are you entitled to claim a deduction for capital works for the costs incurred for the following to your rental property?

· replacing of kitchen cupboards

· replacement of built in wardrobes and linen cupboard?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You acquired a duplex that has been rented since its purchase.

The property is several years old.

The roof of the duplex has been leaking for some time but neither your tenants nor your real estate agent ever brought the problem to your attention.

You engaged a plumber to repair the roof but you were advised that the roof was beyond patching and a new roof was the most practical way of rectifying the problem.

When replacing the roof it was apparent there was extensive damage to the wall, ceilings, electrical wiring, fittings and built-in cupboards.

You had the following work undertaken :

· replacement of roofing and guttering

· painting of interior and exterior of house

· repairs to water damaged walls, ceiling and doors

· replacing of kitchen cupboards

· replacement of built in wardrobes and linen cupboard.

Repairs and replacements were ostensibly the same materials.

You have provided copies of invoices for the work undertaken.

You have provided a copy of a plumber's report faxed to your real estate agent.

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

The word repair is not defined within the legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710 (W Thomas), 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 indicates that expenditure for repairs to a property is of a capital nature where:

· the work is an initial repair, or

· the extent of the work carried out represents a renewal or reconstruction of the entirety, or

· the work results in an improvement in the property rather than a repair.

What is entirety?

In the W Thomas, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building.

Paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered to be a subsidiary part rather than the entirety.

Repair or improvement

TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.

Paragraph 16 of TR 97/23 states 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 is not deductible under section 25-10 of the ITAA 1997.

Paragraph 45 of TR 97/23 distinguishes between a 'repair' and an 'improvement' to property which one needs to consider the effect that the work done on the property has on its efficiency of function.

Capital works

Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

Section 43 -10 of the ITAA requires that:

· the capital works has an area in which capital works is carried out, the work is begun after 30 June 1997, and the expenditure incurred is for capital works that are owned or leased by the taxpayer section 43-75 of the ITAA 1997)

· there is an amount of construction expenditure incurred that is attributable to the capital works area (section 43-85 of the ITAA 1997), and

· the construction area must be used in a deductible way at some time during the year of income for the purpose of producing assessable income.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%.

However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997).

In your case, you were required to replace the roof of your duplex as it was beyond repair. When doing so, it was apparent that there was extensive damage to the interior and you were required to carry out repairs to walls, ceilings, doors and replace electrical wiring, kitchen cupboards and built- in wardrobes and painting of the interior and exterior of the property. Replacement and repairs were ostensibly the same materials.

Repairs

Roof and guttering, walls, ceilings and doors

The works carried out to the duplex are not considered to be initial repairs. The property has been held as an income producing asset.

The works performed in replacing the roof and guttering, damaged walls, ceilings and doors constitute repairs as the work carried out is merely a replacement or renewal of parts of the rental property that were damaged or deteriorated. The property has been restored to its former state, restoring the efficiency of function without changing its character, using the same materials. The work undertaken does not represent a renewal or reconstruction of the entirety as the work carried out was to subsidiary parts of the whole building.

Therefore, you are entitled to a deduction for the cost of replacing the roof and guttering, repairs to the ceiling, walls, and doors of your rental property under section 25-10 of the ITAA 1997.

Painting

Expenses incurred for painting of the rental property are considered to be a repair and are deductible under section 25-10 of the ITAA 1997.

Capital works

You have replaced both the kitchens to your duplex, built-in wardrobes and linen cupboards. Kitchen cupboards are separately identifiable representing an entirety in themselves and the replacement of these results in an improvement or a renewal or reconstruction of an entirety. They are fixtures and therefore, a part of the building because they satisfy the 'degree of annexation' and the 'object of annexation' tests that are generally applied to determine whether there is a fixture at common law. The kitchen cupboards are not in place simply by their own weight but are fixed with the intention that they shall remain there indefinitely.

Similarly, the built-in wardrobes and linen cupboards are also considered to be capital improvements rather than a repair. Therefore, an immediate deduction is not available under section 25-10 of the ITAA 1997.

However, you are entitled to a deduction for capital works under section 43-10 of the ITAA 1997 for the kitchen cupboards, built-in wardrobes and linen cupboards.