Edited version of private ruling

Authorisation Number: 1011666988571

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Ruling

Subject: Rental deduction

1. Are you entitled to a deduction for repairs for the following work carried out to your investment property?

· reinstating weatherboards and plaster

· patching and repairing floor and roof

· reblocking of rear corner of house and replacing sub floor timbers

· paint and painting costs

· removal and reframing of kitchen window

Yes.

2. Are you entitled to a capital works deduction for the following work carried out to your investment property?

· rewiring and extra wiring to switchboard

· remove old and replace new kitchen and cabinets

· plumbing to connect kitchen

· kitchen sink

· removing chimney and reframing wall

Yes.

3. Are you entitled to claim a deduction for decline in value for the following items listed?

· oven

· dishwasher

· gas cook top

· rangehood

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling

· copy of the original maintenance invoice.

You own a rental property which has been tenanted for many years.

It has been gradually deteriorating during this time.

Works were required to repair the property to enable it to be continually tenanted.

Work preformed included:

· reinstating weatherboards and plaster

· patching and repairing floor and roof

· reblocking of rear corner of house and replacing sub floor timbers

· paint and painting costs

· removal and reframing of kitchen window

· rewiring and extra wiring to switchboard

· new kitchen and cabinets

· plumbing to connect kitchen

· kitchen sink

· removing chimney and reframing wall

· new oven ,gas cook top, dishwasher and rangehood.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 43-10.

Income Tax Assessment Act 1997 subsection 40-30(1).

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Section 43-75.

Income Tax Assessment Act 1997 Section 43-85.

Reasons for decision

Repairs

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, to the extent that the expenditure is not capital in nature.

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition 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.

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

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.

It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, 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.

In your case, your property has been rented for 25 years, it has gradually been deteriorating during the rented period.

You have incurred expenses for the following work on your rental property in relation to:

· reinstating weatherboards and plaster

· patching and repairing floor and roof

· reblocking of rear corner of house and replacing sub floor timbers

· paint and painting costs

· removal and reframing of kitchen window.

As a result you have incurred expenses to restore your property to a rentable state. The above items are not considered to be capital in nature. Therefore, you are entitled to a deduction for these repairs.

Capital Works

Section 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 1997 requires that:

· the capital works have 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 purposes 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 have incurred expenses for the following, which are considered to be capital works on your rental property in relation to:

· rewiring and extra wiring to switchboard

· remove old and replace new kitchen and cabinets

· plumbing to connect kitchen

· kitchen sink

· removing chimney and reframing wall

Therefore, you are entitled to a capital works deduction for the above items.

Decline in Value

Division 40 of the ITAA 1997 deals with deductions for the decline in value of depreciating assets. Division 40 allows you to deduct an amount equal to the decline in value of a depreciating asset (an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used) that you hold. 

The decline in value of a depreciating asset is calculated on the basis of its effective life. You may either make your own estimates of effective life or use the Commissioners effective life determinations. Taxation Ruling TR 2009/4 advises the Commissioner's determination of the effective life of a list of assets.

There are two methods of working out a deduction for the decline in value of a depreciating asset such as a computer, tools and equipment:

· the diminishing value method, or

· the prime cost method.

You can also work out the effective life of a depreciating asset yourself having regard to the wear and tear you reasonably expect from your expected circumstances of use. 

You have had to replace the oven, gas cook top and have added a dishwasher and rangehood in your rental property. As these items are considered to be depreciating assets, you are entitled to a deduction for the decline in value spread over their effective life.