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Edited version of private ruling
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Ruling
Subject: Rental property expenses - repair - roof replacement
Question
Is the entity entitled to a deduction for the cost of replacing the roof of a rental property?
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
The entity purchased a rental property.
Since time of acquisition the property has always been rented out to tenants.
At the time of purchase the corrugated iron roof of the property was in reasonably good condition with no evidence of corrosion.
Minor repairs have been undertaken on the roof.
The roof is currently in a bad condition with corrosion present in many areas.
The entity will replace the roof.
The material of the new roof will be made of zincalume kliplock.
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.
Taxation Ruling TR 97/23 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. Taxation Ruling 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.
An entirety is defined as something separately identifiable as a principal item of capital equipment (Lindsay v. FC of T (1961) 106 CLR 377 at 385). Paragraph 40 of Taxation Ruling 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.
In your case, the rental property roof has corrosion present in many areas and subsequently the integrity of the roof has deteriorated to a level where it now requires replacement. It is accepted the use of zincalume kliplock to replace the corrugated iron constitutes a repair as the change in material will not improve the efficiency or function of the property. The roof has merely been repaired by its modern equivalent which restored the original function.
Therefore, the entity is entitled to a deduction for the cost of replacing the roof of the rental property under section 25-10 of the ITAA 1997.