Edited version of private ruling

Authorisation Number: 1011719694737

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Ruling

Subject: Rental property repairs

Question

Can you claim the cost of a partial roof replacement as a repair?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You have a commercial rental property.

You have replaced an old section of iron roof with a galvanised iron roof. It is estimated that 50% of the property comprised the old iron roof, and that 60% of this area was damaged.

Over the years, damage has been caused to the iron roof due to store signs being installed and removed, installation of air-conditioners and extraction fans, and then maintenance to same.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10.

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.

What is a 'repair'

The word 'repair' is not defined within the taxation legislation. Accordingly, it takes 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, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

Paragraph 16 of TR 97/23 states that to repair property, improves to some extent the condition it was in immediately before the 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.

In W Thomas & Co v. FC of T (1965) 115 CLR 58, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.

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 '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 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'.

The item being replaced in this situation is a section of the roof of your commercial rental property. The roof forms part of the building and would not have any separate function of its own.

Therefore the work carried out is not regarded as an entirety.

A repair or improvement

Relevant considerations as to whether work carried out constitutes an improvement are given by TR 97/23 (paragraph 124). These are:

· * whether or not the thing replaced or renewed was a major and important structure of the property

· whether the work performed did more than meet the need for restoration of efficiency of function, bearing in mind that 'repair' involves a restoration of a thing to a condition it formerly had without changing its character

· whether the thing was replaced with a new or better one, and

· whether the thing has considerable advantages over the old one, including the advantage that it reduces the likelihood of repair bills in the future.

Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant.

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.

In your case, you are replacing 50% of the iron roof of your commercial rental property using galvanised iron, a material that is the modern equivalent of iron. The new material may be viewed as better than the old in that it is likely to require less maintenance in the future. However, any increase in efficiency of function of the commercial rental property as a whole is considered to be minor. Although only a portion of the replaced roof was damaged, there is not 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.

We conclude that the partial replacement of the roof is not an initial repair, the replacement of an entirety, or an improvement. Hence, the replacement of 50% of the existing iron roof of your rental property with galvanised iron is a 'repair' and therefore the cost is deductible under section 25-10 of the ITAA 1997.