Edited version of private ruling

Authorisation Number: 1011678927642

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Ruling

Subject: Rental property expenses

1. Are you entitled to your share of an immediate deduction for the bathroom work done to your rental properties?

Yes.

2. Are additional costs for work to be done in your other rental properties, to rectify damaged shower base and walls, and replacement of worn and broken parts in the bathroom deductible as repairs?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

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, and

· further written information with attached photos.

You purchased a set of units with your spouse over 12 months ago.

You have undertaken some works in the bathroom on two of the units.

The works were required due to water leaking at the shower base. This water leak resulted in rot to the internal walls in the shower and the gyprock wall behind the toilet.

The bathrooms are on a common dividing wall.

The works included the following:

· new tiles to the shower

· new full glass shower screen

· replacement of part of the gyprock wall behind the toilet

· painting of the rest of the wall to match the new gyprock wall

· toilets were replaced as they were aged with worn porcelains in the bowls and leaking cisterns

· replaced broken mirror and toilet roll holder.

You and your spouse paid for the expenses.

You have kept receipts for all the work and supplies paid for.

The works were carried out by a licensed builder and his tiler, a licensed plumber.

You are not expecting any insurance or other payment for these works.

You state that there is no major advantage to your tenant as the bathroom still provides the same service as before.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10.

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 entitled to claim an immediate deduction for your share of the cost for replacement of the shower screen and tiles, replacement of the gyprock wall behind the toilet, painting of the rest of the existing gyprock wall, replacement of the toilet and replacement of the broken mirror and toilet roll holder. The expenses incurred are considered a repair and deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Future expenditure to carry out the same work in your other rental properties will also be deductible.

Detailed reasoning

Repairs

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income-producing purposes providing the expenditure is not of a capital nature.

Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred for repairs is an allowable deduction. This ruling indicates that expenditure for repairs to property is of a capital nature where:

· the work is an initial repair

· 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 a repair.

Expenditure incurred to remedy defects, damage or deterioration in existence at the time property is acquired is an initial repair and is of a capital nature and not deductible under section 25-10 of the ITAA 1997. It is immaterial that at the time the taxpayer may have been unaware of the condition of the property, including its need for repair.

An entirety is defined as something separately identifiable as a principal item of capital equipment (Lindsay v. Federal Commissioner of Taxation (1960) 106 CLR 377; (1960) 12 ATD 197; (1960) 8 AITR 99).

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

An improvement provides a greater efficiency of function and involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. If the work done restores a previous function, or restores the efficiency of the previous function, it does not matter that a different material is used.

Some factors that point to work done to property being an improvement include whether the work will extend the property's income-producing ability or extend the property's expected life or reduce the likelihood of repair bills in the future.

In your case, you incurred expenses to have works done to the bathroom.

Shower screen and tiles

Your shower was damaged as a result of a leaking shower base. You were required to fully remove the existing tiles and sheeting in the shower and replace with new tiles. You have replaced the tiles on the floor and re-tiled the gyprock walls in the shower.

The shower hubs were rotten so these were removed and replaced with glass screen. The whole shower screen and frame had to be replaced as the existing frame would not match the new framework.

The replacement of the shower screen does not result in a greater efficiency of function of the bathroom and is therefore not an improvement and is not a renewal or construction of an entirety. The shower recess is a function of the bathroom and replaced to restore the shower to its previous condition.

Accordingly, the cost of replacing the shower recess and the cost for replacing the tiles in the shower are not capital in nature and are deductible under section 25-10 of the ITAA 1997.

Damaged wall

Internal walls to the bathroom and toilet were damaged by the water leak as they share common walls and were required to be replaced. The walls were replaced using similar materials. The walls are a subsidiary part of the building and are not an entirety and have been restored to its original function.

Therefore, the costs incurred in replacing the gyprock walls are considered to be a repair and are deductible under section 25-10 of the ITAA 1997.

Painting

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

Replacement of toilet

You have had to replace the toilet as the ceramic inside the toilet bowl was worn off and the cistern was leaking. The toilet was replaced with a similar standard.

The costs of replacing the toilet are considered to be a repair and are deductible under section 25-10 of the ITAA 1997

Replace broken mirror and toilet roll holder

Costs to replace the broken mirror and toilet roll holder are considered to be a repair and are deductible under section 25-10 of the ITAA 1997.

Future repairs

Future expenditure to rectify problems with the bathroom would be deductible as a repair as the work will restore parts of the existing walls without changing its original character.

The new shower recess and new tiles would not result in a greater efficiency of function of the bathroom. The same applies to the replacement of the worn toilet and broken cistern, and broken mirror and toilet roll holder. Thus, the expenditure incurred will be deductible under section 25-10 of the ITAA 1997.