Edited version of private ruling

Authorisation Number: 1011791691227

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Ruling

Subject: Rental Property Repairs

Question 1

Are you entitled to a deduction for roof repairs to your property after it had ceased being an income producing asset?

Answer

Yes.

Question 2

Are you entitled to claim the replacement of your upstairs ceiling in your property as environmental protection expenses?

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

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased the property approximately 5 years ago.

You approximate the house is XX years old.

You lived in the property after purchase up until you moved out and it became a rental.

Your property was rented for approximately 18 months until part way through the 20XX-XX financial year.

Rent was charged at a market rate.

The property was empty after your tenant moved out until later in the 20XX-XX financial year when you and your spouse moved back into the house.

During the period the house was empty you had the following work done:

· 80% of the iron roof was repaired due to leaks from holes and rust with new colourbond iron.

· The upstairs ceiling was sagging in a few places - on inspection by your builder it was found that approximately 75% of the ceiling was asbestos. You could either put a false ceiling in below the current ceiling or remove the portion of the ceiling with asbestos and replace it with a plaster ceiling. You took the latter option for safety reasons.

The building inspection report you acquired prior to the purchase of the property states that the roof had some rust spots and one hole.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-10
Income Tax Assessment Act 1997 Section 40-755

Reasons for decision

Question 1

Roof Repairs

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, 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.

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 was income producing for approximately 18 months. The property was merely restored to its original structure, function and appearance. As the essential character of the property was not altered, the work is therefore considered to be a repair and not an improvement.

Also, the work is not an initial repair as although there was some rust and a hole in the roof when the property was purchased, the roof at that time was not in need of the work that you have now carried out.

The need for repairing the roof of the property relates to the period the property was income producing. Also the property was used to produce assessable income in the year in which the expenditure was incurred.

The fact that these repairs were carried out after the property had ceased to produce assessable income does not alter your entitlement to claim a deduction for the cost of the repairs. Therefore, the expenditure incurred in relation to the repairs is considered to be an allowable deduction under section 25-10 of the ITAA 1997.

Question 2

Ceiling Replacement

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Section 8-5 of the ITAA 1997 provides that a specific deduction is allowed for an amount that is made deductible under another provision.

Section 12-5 of the ITAA 1997 lists those provisions which allow specific types of deductions. Contained in this list is section 40-755 of the ITAA 1997 which deals with deductions for environmental protection activities.

Section 40-755 of the ITAA 1997 allows a deduction for expenditure, including expenditure of a capital nature, incurred on or after 30 June 2001 by taxpayers for the sole or dominant purpose of carrying on eligible environmental protection activities.

These activities are the preventing, fighting or remedying of pollution (which includes contamination of the environment by harmful or such potentially dangerous substances as asbestos) in the circumstances specified in paragraph 40-755(2)(a) of the ITAA 1997. Also included are activities in treating, cleaning up, removing or storing of waste in the circumstances specified in paragraph 40-755(2)(b) of the ITAA 1997. The pollution or waste must be of, on or from a site on which the taxpayer carried on, carries on, or proposes to carry on an activity for the purpose of producing assessable income.

Section 40-760 of the ITAA 1997 states that a deduction for undertaking environmental protection activities is not allowable for the construction of a building, structure or structural improvement or for an extension, alteration or improvement to a building.

Removing and replacing the asbestos roof, walls and ceiling of a building which is or was used to produce assessable income constitutes an eligible environmental protection activity. Also this work is not considered to be an extension, alteration or improvement to the building as it is merely replacing the asbestos items with the same items made from plaster.

The environmental protection provisions are provisions of last resort. Paragraph 40-760(1)(e) of the ITAA 1997 provides that if a deduction for environmental protection activities is allowable under another provision of the ITAA 1997, the expenditure is not deductible under section 40-755 of the ITAA 1997.

Non-capital expenditure incurred on repairs to plant or to premises held or used for the production of assessable income is specifically made deductible under section 25-10 of the ITAA 1997. However, the removal and replacing of the ceiling of the property does not qualify as a repair for the purposes of section 25-10 of the ITAA 1997 as the work does not remedy or makes good defects in, or damage to, or deterioration (in a mechanical or physical sense) of, the rental property. Although there was some damage to the ceiling, the extent of the damage did not necessitate their complete removal and replacement. This was done to remedy the pollution risk posed rather than to repair the actual damage to the ceiling.

Also, the expense is considered to be capital in nature as it is a one-off cost that results in a lasting advantage, that is, the removal of the pollution risk. Therefore, a deduction is not allowed under section 8-1 of the ITAA 1997.

As there is no other provision of the ITAA 1997 under which a deduction for the expense is allowable, you are entitled to a deduction under section 40-755 of the ITAA 1997 for the cost of removing and replacing the ceiling of the property as it is an eligible environmental protection activity.