Edited version of private ruling

Authorisation Number: 1011775506916

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Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for repairs for the following work carried out to your rental property?

· painting interior of unit

· replacement of kitchen wall tiles

· replacement of light fittings

· replacement of toilet fittings

· repairs and replacement of door handles, door stops and power points

· removal of palm trees and green waste

Answer

Yes

Question 2

Are you entitled to a deduction for replacing the following items to your property?

· kitchen

· kitchen and toilet floor tiles

· rangehood

· cooktop

· oven

· sink

Answer

No

Question 3

Are you entitled to a deduction for repairs for work carried out to your property and paid for after 1 July 2010?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You own a unit which had been your principal place of residence prior to living overseas.

Your unit was rented for a number of years and up to when your last tenant left towards the end of the 2009-10 financial year.

You returned from overseas and lived in accommodation provided by friends whilst you had repairs carried out to your unit.

You did not move back into your unit until later.

You had the following work carried out and paid for prior to 30 June 2010:

· painting of interior of the unit

· removal of palms trees and green waste

· replacement of kitchen

· replacement of range hood, oven, cook top and sink

· replacing toilet fittings

· replacing of kitchen and toilet floor tiles

· replacing of kitchen wall tiles

· replacement of light fittings

· miscellaneous repairs to door handles, door stops and power points

You had the following work carried out and paid for after 1 July 2010:

· Blind and window cleaning

· Plumbing

· Repairing of walls, cornices and doors

· Electrical

· Purchasing of cleaning products

The unit is open planned. As you removed the carpets in the open area and replaced with tiles, the kitchen and toilet tiles were changed for continuity. They could not be matched as they were dated and chipped.

You had delays with some tradesmen and although some work had commenced prior to 30 June 2010 you could not pay until July 2010 as invoices were not issued until later.

You state the unit had suffered wear and tear over the time of being rented and the work carried out was to restore the unit to its original condition prior to renting.

Reasons for decision

Summary

You are not entitled to a full deduction for the work completed on your rental property. Work such as the repainting of the unit, replacement of light fittings, kitchen wall tiles and toilet fittings and removal of certain trees and garden waste restore the efficiency of function, do not provide any substantial improvement, and are considered repairs and are deductible as incurred before 30 June 2010.

However, you are not entitled to a deduction for repairs after the 30 June 2010. These expenses were not incurred during a time when your property was being used for the production of assessable income.

You are not entitled to a deduction for replacing of the kitchen, floor tiles for the kitchen and toilet, rangehood, cooktop, oven and sink as the expenditure is capital in nature.

Detailed reasoning

Repairs incurred before 30 June 2010

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, to the extent that the expenditure is not capital in nature.

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.

In your case, you have owned the rental property for several years. The property has been income producing for the past eight years. You returned from overseas and due to wear and tear were required to carry out repairs to restore the property to its original condition, prior to renting. You have provided a detailed list of work carried out. The following are considered to be repairs -

· painting interior of unit

· removal of palm trees and green waste

· repairs and replacement of door handles, door stops and power points

· replacement of kitchen wall tiles

· replacement of light fittings

· replacement of toilet fittings

You have incurred expenses to restore your property to its original function. The above items are not considered to be capital in nature. Therefore, you are entitled to a deduction for these repairs as they were incurred in the year when the property was rented.

Replacement of kitchen and toilet floor tiles

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.

It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, 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.

You have replaced the kitchen and toilet floor tiles to match the floor tiles in the open area. Whilst there was some damage to the tiles, the work done went beyond that of a repair. The replacement of the kitchen and toilet floor tiles was done in conjunction with improvements made in the open area bringing the property to a more valuable or desirable state. The work done is considered to be an improvement rather than a repair and therefore is capital in nature and not deductible under section 25-10 of the ITAA 1997.

Replacement of kitchen, rangehood, cooktop, oven and sink

TR 93/23 states that expenditure for repairs is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of an entirety.

Paragraph 38 of TR 97/23 states that a property is more likely to be an entirety if:

· the property is separately identifiable as a principal item of capital equipment; or

· the thing or structure 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; or

· the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

· the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.

The kitchen cupboards are a separately identifiable thing representing an entirety in themselves and the expenditure on replacing the kitchen cupboards results in a renewal or reconstruction of an entirety. The expenditure is not a repair but is capital in nature.

The rangehood, cooktop, oven and sink are separate and distinct items of plant in themselves. The expenditure in replacing these represents a renewal of an entirety and is capital in nature.

Therefore, you are not entitled to a deduction for replacing of the kitchen, rangehood, cooktop, oven and sink under section 25-10 of the ITAA 1997.

Repairs after 1 July 2010

You may still be considered to hold a rental property for income purposes at the time of the repair even if it is vacant at that time. 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.

In your case, the property had been rented for a number of years, with little maintenance being carried out during this time. It is accepted that the necessity for the repairs was attributable to the period that the property was being used to produce rental income for you. However, the property is no longer income producing as you are now using the property as your main residence.

You carried out and paid some of the repairs in 2010-11 financial year, after your property ceased being an income producing asset.

In applying the principles expressed in IT 180, these expenses where not incurred during a time when your property was being used for the production of assessable income. Therefore, the expenditure incurred in relation to those repairs is not considered an allowable deduction under section 25-10 of the ITAA 1997.