Edited version of private ruling

Authorisation Number: 1011738181353

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Ruling

Subject: Rental property repairs

Question 1

Are you entitled to a deduction for repairs to an awning attached to your rental premises?

Answer

Yes.

Question 2

Are you entitled to a deduction for replacing sections of roofing to your rental premises?

Answer

Yes.

Question 3

Are you entitled to a deduction for the cost of replacing a sanitary pump and waste pump association with your rental property?

Answer

No.

Question 4

Are you entitled to a deduction for the decline in value in replacing the sanitary pump and waste pump associated with your rental property?

Answer

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 own commercial premises that have been rented for many years.

The premises are located in an inner suburb of a metropolitan city that has heavy vehicle traffic and is currently tenanted.

The premises have a front awning that has been subjected to normal wear and tear along with damage from motor vehicles.

In the financial year the awning was damaged which due to the age of the building left the awning in danger of collapse and becoming a hazard.

You found that sections of the roof of the building had rusted and leaks formed causing damage to the tenancies of the building.

You had the following work undertaken to restore the awning to its original condition and replace the rusting sections of the roof:

· repair and replacement of damaged/severely weathered timberwork in the front awning of the building,

· replace rusted roofing in the awning,

· replace rusted roofing sheets of the building,

· repair timberwork due to water damage from rusted roof sheeting,

· repairs to sections of damaged flashing due to rusted sheets

The design, size and quality of the awning repaired are the same as it was previously and the décor has not changed.

The roof was not replaced in its entirety as only sections of damaged roofing were replaced to its original functionality as the same type of materials were used to replace the rusted roof sheeting and damaged timberwork.

You have made no insurance claims for damage to the awning from car accidents.

You have also incurred expenses to replace a sanitary pump and a waste pump.

You are able to substantiate costs incurred and have provided invoices and costing for the work undertaken.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40,

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 25-10 and

Income Tax Assessment Act 1997 Section 40-25.

Reasons for decision

Summary

You are entitled to a deduction for costs incurred in repairing the awning and replacing sections of the roof to your rental premises.

You are not entitled to a deduction for the cost of replacing the sanitary pump and waste pump. You are entitled to a deduction for the decline in value of the sanitary pump and waste pump

Detailed reasoning

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.

The meaning of repairs

The word 'repairs' is not defined in the ITAA 1997. In its context in section 25-10 of the ITAA 1997, the word 'repairs' bears 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, damaged or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

TR 97/23 refers to the case of W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR; (1965) 14 ATD 78; 1965 9 AITR 710, 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 work results in an improvement in the property rather than a repair.

What is entirety?

In the W Thomas & Co case, 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.

Paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered to be a subsidiary part rather than the entirety.

Repair or improvement

TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.

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.

Paragraph 45 of TR 97/23 distinguishes between a 'repair' and an 'improvement' to property which one needs to consider the effect that the work done on the property has on its efficiency of function.

Awning and building roof

In your case, you have a commercial property with a front awning that has been subject to wear and tear and has been damaged. Due to the age of the building the awning was in danger of collapse and becoming a hazard.

You used the same type of materials to repair the awning and have not changed the design and quality of the awning or the décor.

In addition you have found that sections of the roof of the building had rusted and leaks formed causing damage to the tenancies of the building. You have used the same type of materials to replace the rusted roofing and timberwork.

The work undertaken has not resulted in a greater efficiency of function of the awning and the roof and is therefore not an improvement. It is not a renewal or reconstruction of an entirety. The awning and the roof are a subsidiary part of the building and have been restored to their original function.

Accordingly, the cost of replacing the awning and sections of the roof are a repair and are deductible under section 25-10 of the ITAA 1997.

Sanitary pump and waste pump

Section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings which are incurred in the course of gaining or producing assessable income. However, no deduction is allowed where the losses or outgoings are capital, or are of a capital, private or domestic nature or another provision prevents the taxpayer from deducting it.

An outright deduction is not allowable under section 8-1 of the ITAA 1997 for the cost of the pumps as it is considered to be a capital expense.

Deduction for the decline in value of the pumps in relation to your income earning activities

As the pumps are a capital expense, a deduction may be allowable under Division 40 of the ITAA 1997 for the decline in value of the pumps.

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of depreciating assets held and used for a taxable purpose, or were installed ready for that purpose. Thus, a deduction will only be allowable where a nexus exists between the use of the asset and how the taxpayer derives their assessable income.

In your case the sanitary pump and the waste pump are used for a taxable purpose in your rental property. The decline in value of an asset is based on its effective life (either self-assessed or as determined by the Commissioner, although some assets have a capped effective life).

A depreciating asset starts to decline in value when the asset is first used for any purpose. A taxpayer can use either the prime cost or the diminishing value method to depreciate the asset. The deduction is reduced to the extent that the asset was used for a non-taxable purpose.

You are therefore allowed to depreciate the decline in value of the pumps over their effective life.