Edited version of private ruling

Authorisation Number: 1011652821141

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Ruling

Subject: Rental property - repairs

Are you entitled to a deduction for repairs to your rental property?

Yes.

This ruling applies for the following period

Year ended 30 June 2010.

The scheme commenced on

1 July 2009.

Relevant facts

You purchased a unit in a block of units.

The unit is a rental property.

The common property in the block of units is managed by a Strata Corporation.

Walls in the courtyard deteriorated and became dangerous.

The walls were replaced.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

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 word repair is not defined within the taxation 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, 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 property is of a capital nature where:

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

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

· the work is an initial repair.

In your case, the work was not an initial repair as the damage was not in existence when you acquired the property.

The work carried out was not to an entirety, as it was renewing a part of the property, being the courtyard walls.

Whether work done constitutes a repair or an improvement is discussed in TR 97/23. The ruling states that one has to consider the effect that the work has on the efficiency of function of the property, not the part. The replacement of a damaged subsidiary part of a property with a part better in some ways than the original is a repair to the property rather than an improvement where there is no significant increase in the efficiency of function of the property. TR 97/23 states that work done in anticipation of forthcoming defects or deterioration can be considered a repair where it is done in combination with work of rectification.

As stated in paragraphs 48 to 50 of TR 97/23, using different materials in replacing or renewing part of a property does not mean that an improvement has taken place, where the work merely restores the efficiency of function of the overall structure. In your case, any increase in efficiency of function that may result from the application of the material and the rendering is not considered sufficient to change the character of the work done from a repair to an improvement.

The works to be carried out were occasioned by factors that occurred during the period of income production and undertaken merely to restore the efficiency of the function of the property, to rectify damage and to prevent further damage.

Therefore, the work undertaken is considered to be a repair and you are entitled to a deduction under section 25-10 of the ITAA 1997.