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Edited version of private ruling
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Ruling
Subject: Replacing roof
Question:
Are you entitled to a deduction for your share of the expenses incurred in replacing the roof of a rental property?
Answer: Yes.
Relevant facts
You are the part owner of a rental property which has been rented for the entire time you have owned it. When you took ownership of the property almost ten years ago the roof was in good condition. For the past two years you have had water problems internally because the roof was leaking.
You were advised by roofers that the roof was showing signs of wear and tear, and as it was not possible to have it repaired in a cost effective manner, you had a new roof constructed of similar materials. The work carried out did not in any way change the roofline, and made good the deterioration which was caused by wear and tear.
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) 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. 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, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.
In W Thomas & Co v. FC of T (1965) 115 CLR 58, 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.
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. 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'. The replacement of the roof is therefore not the replacement of an entirety.
Expenditure will also be capital in nature if it is for an improvement or an initial repair. The use of a like material to replace the existing roof does not constitute an improvement as the change in material did not improve the efficiency of function of the property. Also, the replacement of the roof is not an initial repair as the roof was in good working order when you acquired the property. The damage was caused by wear and tear during the time it has been rented.
Therefore, you are entitled to a deduction for the cost of replacing the roof of your rental property, under section 25-10 of the ITAA 1997.