Edited version of private ruling

Authorisation Number: 1011770363517

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Ruling

Subject: Rental deductions

Question

Are you entitled to an immediate deduction for the cost of replacing the veranda and staircase on your rental property?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You are the owners of a commercial rental property. The property consists of a shop on a main shopping strip, with residential tenancies at the rear of the building.

The rear of the shop had a wooden staircase and a wooden veranda leading to the residential tenancies upstairs.

The property is located near the beach, and due to the constant sea spray the wooden veranda had deteriorated to a state where it was no longer safe for tenants. The tenants had to leave the property so that repairs could be undertaken.

You obtained quotes to replace the veranda and stairs back to the original condition using the same materials (treated timber). The quotes obtained were not affordable to you.

You decided to replace the wooden veranda and staircase with concrete as it was a more affordable option.

The new veranda is the same dimensions and the staircase is in the same position as the original one.

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) states expenditure incurred by you for repairs to premises used by you for the purpose of producing assessable income is an allowable deduction. However, a deduction is not allowable if the expenditure is of a capital nature.

Taxation Ruling TR 97/23 provides the Tax Office's view on repairs that are allowable under section 25-10 of the ITAA 1997 and 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 work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or

· the work is an initial repair.

Replacement of a subsidiary part or an entirety

In the case of W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation [1966] ALR 915;115 CLR 58; (1965) 14 ATD 78; 39 ALJR 246; (1965) 9 AITR 710, 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.

In your case, the building is itself considered to be the entirety. The veranda and stairs are considered a subsidiary part of the building. 

Improvement v Repair

The Commissioner accepts that the use of a different material does not necessarily prevent the work from being a repair, provided the work merely restores a previous function to the property. 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.

The repair is not considered to be an initial repair and in your case we consider the work undertaken to your rental property merely restores the efficiency of the previous function.

Therefore the work undertaken is considered to be a repair and you are entitled to a deduction under section 25-10 of the ITAA 1997.