Edited version of private ruling

Authorisation Number: 1011680323292

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Ruling

Subject: Rental property expenses

Question:

Are you entitled to a deduction for the repair work carried out on your rental property?

Answer:

Yes

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant Facts

You have a rental property which has been rented since 1990.

Over a period of time the property has suffered water damage during heavy rains. Work to rectify the cause of the water damage was attempted by plumbers and builders, but the problem was ongoing.

The water damage was caused by stormwater drains becoming blocked and the gutters overflowing back into the house damaging the kitchen, laundry, bathroom and the third bedroom of the house.

To rectify the problem the stormwater drains needed to be completely replaced.

You incurred costs to undertake the following work;

· replacement of stormwater drains (which included the incidental removal of a small tree to allow access for machinery)

· replacement of rusted downpiping and guttering

· replacement of damaged floorboards, re- sanding of some floorboards and the staining of new floorboards

· replacement of damaged asbestos sheeting

· replacement of broken shower screen

· replacement of rusted laundry tubs and piping

· replacement of leaking galvanised water piping

· replacement of water damaged kitchen cupboards (with cupboards of a similar style, material and size). Undamaged kitchen cupboards were not replaced.

· repainting of the rooms affected by water damage

Whilst the above work was being carried out you also undertook improvement work to build a new deck, add built-in cupboards to two bedrooms, fit security screens to the house and the supply of new mains and an earthstake.

Reasons for decision

Deduction for repairs

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to a rental property.

To be eligible to claim such an expense you must be holding the property for the purpose of gaining or producing assessable income, and the expenses must not be capital in nature.

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.

The meaning of repairs

The term 'repairs' is not defined in section 25-10 of the ITAA 1997. Therefore, it is necessary to look at its ordinary meaning. Paragraph 13 of Taxation Ruling TR 97/23 states the following:

The word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

At paragraph 44, the ruling goes on to state:

In the case of a 'repair', broadly speaking, the work restores the efficiency of function of the property without changing its character...

The significant factor is the restoration of efficiency rather than exact repetition of form or material. For example, in Case 51 (1960) 9 CTBR (NS) 328, it was held that the replacement of a galvanised iron roof with concrete roof tiles was a repair as it did little more than meet a need for restoration. The material in question was designed to perform substantially the same function as that which it replaced.

Repair is distinct from renewal or replacement

Renewal, replacement, or reconstruction of, the whole or substantially the whole of a thing or structure ('entirety') is likely to be considered a capital improvement rather than a deductible repair.

What is an entirety?

Determining what is an entirety is a question of fact in each case. According to TR 97/23, property is more likely to be an entirety if:

(a)   The property is separately identifiable as a principal item of capital

equipment.

(b)   The thing or structure is an integral part, but only a part, of entire premises of

and is capable of providing a useful function without regard to any other part

the premises.

(c)   The thing or structure is a separate and distinct item of plant in itself from the

thing or structure which it serves, or

(d)   The thing is a 'unit of property' as that expression is used in the depreciation

  deduction provisions of the income tax law.

In the case of W Thomas & Co Pty Ltd v. FC of T (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710 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. It was held that the roof would be considered to be part of the building and the work done on the roof was a repair. This view is confirmed in TR 97/23 at paragraph 40.

Improvement or repair

When work is done to restore or 'fix' a damaged item, we need to determine if the work undertaken is a 'repair' or an 'improvement'. Repairs generally restore the item to its former function and efficiency whereas improvements increase an item's functionality and/or efficiency.

A repair may increase the items efficiency slightly and still be classed as a repair. However, where the item's function or efficiency is improved substantially or the work changes the function of the item, the work is considered to be an improvement and capital in nature.

Application of the above to your situation

It is considered that the costs incurred for the following work are deductible repairs:

· replacement of stormwater drains (which included the incidental removal of a small tree to allow access for machinery)

· replacement of rusted downpiping and guttering

· replacement of damaged floorboards, re- sanding of some floorboards and the staining of new floorboards

· replacement of damaged asbestos sheeting

· replacement of a broken shower screen

· replacement of rusted laundry tubs and piping

· replacement of leaking galvanised water piping

· replacement of water damaged kitchen cupboards

· repainting of the rooms affected by water damage

The expenditure is not considered to be incurred on initial repairs, improvements or work undertaken to an entirety.