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Edited version of private ruling
Authorisation Number: 1011707196708
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Ruling
Subject: rental property expenses
Question and answer:
Are you entitled to deduct 50% of the cost of replacing the roof on your rental property?
Yes.
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commenced on:
1 July 2010
Relevant facts and circumstances
You and your spouse purchased rental property.
You and your spouse own the property as joint tenants.
On settlement, the property was available for rental to non-related tenants at market value.
You have never used the property as your principal place of residence or for any purpose other than renting it.
The property has been continuously rented since settlement.
The current tenants will be vacating the property partly as a result of a leaky roof.
You intend to replace this roof.
The expense of the roof replacement will be paid by you and your spouse as joint owners.
The leaks are a result of a gradual deterioration of the asbestos roof sheeting over many years.
As the roof is asbestos, no replacement of it, in its original form, or repairing of it, can be completed. In support of this you had a building/roofing report compiled by a competent contractor, who specialise in the replacement of asbestos roofing. Their report indicates that the roofing material is in poor condition, is leaking and has broken pieces, loose fittings and presents a danger.
It is expected that long-run corrugated colour bond roofing will be used to replace the deficient asbestos roofing.
The guttering is in good condition and should not need replacing though this may change upon the removal of the existing roof.
When purchased, the property was in good overall repair and it has been maintained that way ever since.
No insurance claim, or any other compensation, has been, or will be made or received in respect of the replacement roof.
Full details of the work carried out will be retained.
Relevant legislation provisions:
Income Tax Assessment Act 1997 Section 25-10.
Income Tax Assessment Act 1997 Subsection 25-10(3).
Reasons for decision
You own a property which has been used solely for income producing purposes. It has been available for renting to non related tenants at market value since acquisition.
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.
Taxation Ruling TR 97/23 (TR97/23) 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.
The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. TR 97/23 states that the word 'repair' 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.
TR 97/23 states that a roof is part of building and the building is the entirety. Replacing the existing roof of your property will not involve the renewal or reconstruction of an entirety as the roof is part of an entirety (the dwelling).
The use of long-run corrugated colour bond roofing to replace the asbestos roof on your rental property will constitute a repair as the change in material will not improve the efficiency of function of the property. The new roof will merely replace a roof already there, but worn out and leaking, by its modern equivalent which will restore the original efficiency of function of the property.
Replacing the roof will not be initial repairs as the property has been owned and rented with its existing roof since acquisition.
In your case, the cost of replacing the roof of your rental property will be incurred for income producing purposes and will not be of a capital nature. Therefore, as you and your spouse jointly own the property, you are entitled to a deduction for 50% of the cost of replacing the roof of your rental property under section 25-10 of the ITAA 1997 in the 2010-11 income year.