Edited version of private ruling

Authorisation Number: 1011767418036

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Ruling

Subject: Rental property repairs

Question 1

Are you entitled to a deduction for the cost of sanding and polishing the floors of your rental property that were previously about 50% carpeted?

Answer

Yes.

Question 2

Are you entitled to a deduction for the cost of replacing a laundry trough at your rental property?

Answer

Yes.

Question 3

Are you entitled to a deduction for the cost of replacing four blinds at your rental property?

Answer

No.

Question 4

Are you entitled to a deduction for the decline in value of the replacement blinds if the property continues to be used as a rental property?

Answer

Yes.

Question 5

Are you entitled to a deduction for the cost of replacing the roof at your rental property?

Answer

Yes.

Question 6

Are you entitled to a deduction for the cost of re-enamelling or re-painting the bathtub at your rental property?

Answer

Yes.

Question 7

Are you entitled to a deduction for the cost of replacing five light fittings at your rental property?

Answer

Yes, in part. You are entitled to a deduction for the cost of replacing the three light fittings that were damaged.

Question 8

Are you entitled to a deduction for the cost of replacing two ceiling fans at your rental property?

Answer

No.

Question 9

Are you entitled to a deduction for the decline in value of the two replacement ceiling fans if the property continues to be used as a rental property?

Answer

Yes.

Question 10

Are you entitled to a balancing adjustment deduction for scrapping the stove at your rental property?

Answer

Yes.

Question 11

Are you entitled to a deduction for the cost of replanting the damaged section of lawn at your rental property?

Answer

Yes.

Question 12

Are you entitled to a deduction for the cost of removing two trees at your rental property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You acquired a residential rental property more than 10 years ago.

The property has been used as a rental property for the entire ownership period and has been rented to unrelated parties.

The only time the property has not derived rental income during your ownership is when the previous tenants vacated the property and new tenants were being sought and/or repairs were being undertaken.

The last tenants occupying the house moved out a few months ago.

Since that time, you have either incurred or will incur expenditure in relation to a number of items that are predominately to remedy damage caused by the previous tenants or deterioration that has occurred over the period that the property was rented.

The house is currently vacant while the works are being undertaken.

The following works are being undertaken:

(a) Sanding and polishing existing floors (approximately 50% of these areas were previously carpeted). The existing carpets were damaged beyond repair.

(b) Replacement of double laundry trough with a single laundry trough. The existing trough was damaged by the tenants over time and was beyond repair.

(c) Replacement of four blinds. All the blinds were damaged by the tenants over time and were beyond repair. The total cost was $788 with each blind costing less than $300

(d) Replacement of existing entire steel roof (zincalume) with new steel roof (zincalume). The taxpayer received advice from roof plumbers and was informed that certain sections of the roof were significantly rusted and that overall the roof was in poor condition. Further, the taxpayer was advised that it was not feasible to replace certain badly affected sections of the roof as most of it should be replaced in any event.

(e) Re-enamel or re-paint existing bathtub. The bathtub is made of steel or iron and there are a number of sections in it where the enamel or paint has been damaged over time and in those spots rust is starting to appear.

(f) Replace 5 existing light fittings. Three of the light fittings were damaged and the other two were getting to the stage where they needed to be replaced however they were still working.

(g) Replace two ceiling fans as there were both no longer working.

(h) Proposed scrapping of a stove previously depreciated. The stove is likely to be scrapped as a new kitchen needs to be installed or significant modifications to the existing kitchen being made and it is likely that a new bench oven will be installed as part of this improvement. The stove is being depreciated..

(i) Replanting a section of lawn that has died over time.

(j) Removal of two trees that are likely to cause damage to water piping and the building.

At the time the property was vacated you had the intention of re-renting the property.

After you discovered that the damage to the property was more extensive than first thought and while the house was empty you decided that the house should be properly restored and certain improvements made.

You derived assessable income from the property in the 2011 financial year.

It is anticipated that all the required works will be carried out by 30 June 2011.

At this stage it is intended that once all the works are completed at the property it will be re-advertised to be rented.

Assumption

The repairs will be completed by 30 June 2011.

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

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 word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58); (1965) 14 ATD 78; (1965) 9 AITR 710 (the Thomas Case), 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.

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.

Renewal or reconstruction of the entirety

A repair involves a replacement or renewal of a worn-out or dilapidated part of something but not of the whole thing, that is, the entirety. TR 97/23 states:

Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction, as distinguished from repair, is restoration of the entirety.

The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' (Lindsay v. FC of T (1960) 106 CLR 377; (1960) 12 ATD 197).

In the Thomas Case repairs were made to the roof, guttering, walls and two floors of a building. It was held that the whole building was the entirety, and the question was not whether the roof or the floor or some other part of the building, looked at by itself, was repaired as distinct from being wholly reconstructed or replaced, but whether what was done to the roof or the floor or some other part was a repair of the building.

TR 97/23 states that a thing or structure is more likely to be an entirety if it is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises. The Ruling states that something that is part of a building, for example, a roof or wall, is just that and no more. The building itself is the 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.

Initial repairs

Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not deductible under section 25-10.

The expression 'initial repair' is discussed in TR 97/23. It refers to a repair by a taxpayer that remedies some defect in property or makes good damage to, or deterioration of, property being a defect, damage or deterioration:

· existing at the time of acquisition of the property; and

· not arising from the operations of the taxpayer who incurs the expenditure.

TR 97/23 states:

 

... As a general rule of thumb, but subject to the facts in each particular case, repairs effected soon after the purchase of property often rectify defects in, damage to, or deterioration present in the property at the time of purchase.

Repairs after cessation of income producing use

The cost of repairs to a property after cessation of income producing use is covered in Taxation Ruling IT 180. Paragraph 4 of IT 180 states that a deduction may be allowed for the cost of repairs to property providing:-

· the necessity for the repairs can be related to a period of time during which the premises have been used to produce assessable income of the taxpayer, and

· the premises have been used in the production of such assessable income of the year of income in which the expenditure is incurred.

It does not matter what use the property is put to after the repairs are carried out so long as the costs associated with the repairs are incurred in the same year as assessable income has been earned from the property.

Question 1

Australian Taxation Office Interpretative Decision ATO ID 2002/330 deals with the deduction for expenditure incurred in removing worn carpets and polishing existing floorboards in a rental property.

ATO ID 2002/330 states that a repair involves a restoration of something without changing its character. The significant factor is the restoration of efficiency rather than exact repetition of form or material. For example, in Case 51 (1960) 9 CTBR (NS) 328, it was held that the replacement of a galvanised iron roof with concrete roof tiles was a repair as it did little more than meet a need for restoration. The material in question was designed to perform substantially the same function as that which it replaced.

Polished floorboards perform substantially the same function as the carpet. The materials and processes used in the repair do no more than restore the floor to a functional walking surface.

Replacing worn carpets in a rental property by polishing the floorboards does not materially alter the character or functionality of the rental property. Nor does it increase the life of the rental property.

The removal of the carpets and polishing of the existing floorboards is a repair. Accordingly, the expenditure incurred is deductible under section 25-10 of the ITAA 1997.

Question 2

Your laundry trough has been damaged and is beyond repair. Items such as sinks, baths, troughs etc. are stated in our publication Rental properties 2010 to be non-depreciable. It is considered that the laundry trough is a subsidiary part of the house and that its replacement is an allowable repair.

Questions 3&4

The four blinds in your rental property are in a state of disrepair and need to be replaced. An outright deduction is not allowable under section 8-1 of the ITAA 1997 for the cost of the blinds as it is considered to be a capital expense.

As the blinds are a capital expense, a deduction may be allowable under Division 40 of the ITAA 1997 for the decline in value of the blinds. However, depreciation of assets over their useful life is only available while the property is earning assessable income. Therefore if the house is not rented out again a deduction for the depreciation will not be available.

An immediate deduction may be available for depreciating assets used for income producing purposes where the asset cost $300 or less. However, an immediate deduction is not available if the asset is one of a number of identical, or substantially identical, assets that you acquire in the income year that together cost more than $300.

Your blinds are considered to be substantially identical assets and as they cost more than $300 in total, an immediate deduction is not available for the cost of these depreciating assets.

Question 5

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'.

In your case you have replaced the original zincalume roof with a new zincalume roof. We conclude that the replacement of the roof is not an initial repair, the replacement of an entirety, or an improvement. Hence, the replacement of your roof is a 'repair' and therefore the cost is deductible under section 25-10 of the ITAA 1997.

Question 6

The re-enamelling or re-painting of the bathtub is to restore it to a condition it formerly had without changing its character. It is not a renewal or reconstruction of the entirety nor will it result in a greater efficiency of function in the property.

The cost of re-enamelling or re-painting the bathtub is classified as a repair and is deductible.

Question 7

Three light fittings were damaged and have subsequently been replaced. As you restored the efficiency and function of the items repaired to their original condition prior to the damage occurring, you will be entitled to a deduction under section 25-10 of the ITAA 1997. As the other two light fittings were still working, their replacement is not a repair and is not deductible.

Questions 8&9

Our publication, Rental properties 2010, clearly outlines the items which are considered to be capital in nature. Ceiling fans appear on this list. Therefore a deduction is not allowable for the cost of replacing the ceiling fans.

As with the blinds in question 4 above, the ceiling fans are considered to be a depreciating asset and are eligible for depreciation over its useful life so long as the property is deriving assessable income.

Question 10

The treatment of the stove depends on whether the stove is scrapped, sold or given away.

Stove sold

Division 40 of the ITAA 1997 provides a set of general rules that apply across a variety of depreciating assets including plant.

A holder of a depreciating asset must work out a balancing adjustment if a balancing adjustment event occurs for the asset and the asset's decline in value is worked out under Subdivision 40-B of the ITAA 1997. Paragraph 40-295(1)(a) of the ITAA 1997 provides that a balancing adjustment event occurs for a depreciating asset when you stop holding the asset.

A balancing adjustment event occurs for the stove at the time it is sold. You must work out a balancing adjustment for the stove at the time it is sold by comparing its termination value with its adjustable value. The termination value is the sale price less any expenses that you have not deducted and cannot deduct that are reasonably attributable to the balancing adjustment event occurring for the stove. The adjustable value is its undeducted cost at the date you stopped having it installed ready for use.

· Assessable balancing adjustment

An assessable balancing adjustment arises for an item sold if the termination value of the item is greater than its adjustable value. You must include the difference in the income year the machine was sold.

· Deductible balancing adjustment

A deductible balancing adjustment arises for an item sold if the termination value of the item sold is less than its adjustable value. You can deduct the difference in the income year the machine was sold

Stove scrapped

If the stove is scrapped and no payment is received, the deductible amount is equal to the depreciated down value of the stove at the time it is no longer installed and ready for use.

Stove given away

If the stove is given away, the deductible amount is the difference between the termination value and its market value. Refer to assessable balancing adjustment and deductible balancing adjustment above.

Question 11

In your case you have replaced a section of the lawn to restore it to its previous function. It is not a renewal or reconstruction of the entirety nor will it result in a greater efficiency of function in the property.

The cost of replanting a section of the lawn is classified as a repair and is deductible.

Note

If the whole lawn is replaced it will be considered that it is the replacement of an entirety and will be capital in nature and therefore not deductible.

Question 12

There are two trees on your property that are likely to cause damage to water piping and the building. As the removal of the trees is not actually repairing any damage, a repairs deduction is not allowable.

In any case, the expense is considered to be capital in nature as it is a one-off expense that provides an enduring benefit, that being, the removal of a potential hazard. As the expense is capital in nature, a deduction is also not allowable under section 8-1 of the ITAA 1997.