Edited version of private ruling

Authorisation Number: 1011704975050

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Ruling

Subject: Rental property- repairs

Questions and answers:

Are you entitled to an immediate deduction for the amount you spent on replacing the roof of your rental property?

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 an investment property some time ago.

You rented out your property through a real estate agent.

Your rent the property out at a market rate.

The main roof has concrete tiles and timber trusses.

An extension was undertaken by the previous owner and the roof to the extension is made of metal/ aluminium.

A leakage problem was first noticed some years later.

In about 3 years ago following a big storm the ceiling in the dining area began to bow due to the collection of water. Some repair work was done and paid for by insurance.

The same thing occurred a year later and after repairing the damage the insurance company stated they would no longer pay for any future claims.

The insurance company refused to make any more payments on the roof.

The total cost of the repairs included removal of the roof, replacing rotting timbers, replace rusty skylight, repairs to internal walls and ceilings, replacing downpipes and gutters.

You provided a receipt with a breakdown of the work carried out.

Relevant legislative provisions

Section 25-10 of the Income Tax Assessment Act 1997

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.

Repairs

The word 'repairs' is not defined in the Act. In its context in section 25-10 of the ITAA 1997, the word 'repairs' bears its ordinary meaning. Paragraphs 13-16 of Taxation Ruling TR 97/23 specifically deal with the ordinary meaning of repairs. The word repair ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damaged or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

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. 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.

Capital nature

TR 97/23 indicates that expenditure for repairs to 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 works result in a greater efficiency of function in the property, therefore representing an improvement rather than a repair.

An initial repair

According to paragraph 125 of the TR 97/23, a repair after acquisition of property is an 'initial repair' if the repair was due when the property was acquired, in the sense that there was a need for repair to restore or maintain the property's efficiency of function. In other words, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended.

Renewal of an entirety

Paragraph 38 of the TR 97/23 explains that a property is more likely to be an entirety if:

· the property is separately identifiable as a principal item of capital equipment, or

· the thing or structure is an integral part, but only a part, of the entire premises and is capable of providing a useful function without regard to any other part of the premises, or

· the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves, or

· the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.

Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'.

An improvement

In accordance with paragraph 45 of the TR 97/23, the consideration of whether a repair or replacement is an improvement or not is determined by considering the degree to which the work done restores the efficiency of function of the property.

If the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. However, the greater the work enhances the efficient functioning of the property; the more likely it is that the work constitutes an improvement.

The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility under section 25-10 of the ITAA 1997. If the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement.

Application to your circumstances

An initial repair

You stated that the roof did not require repair at the time the property was purchased. There was no need to restore or maintain the property's efficiency of function. Although the extension has been noted by the builder as a possible cause of the damage it was still functioning and you were able to use the property for income producing purposes.

The replacement of the roof on your rental property does not constitute an initial repair.

Renewal of an entirety

As outlined above the replacement of a roof is not the renewal of an entirety as it is simply a part of a building.

An improvement

You have replaced the whole roof as it was the only way you could stop further damage and gain insurance on your property.

The original part of your roof was tiled and the extension metal. The new roof is made of the one material. The replacement of the roof merely restores the efficiency of previous function. It does not produce a new and different function, or an additional function.

As the replacement of your roof does not constitute an initial repair, is not a renewal of an entirety and is not an improvement you are entitled to an immediate deduction under section 25-10 of the ITAA 1997.