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Edited version of private ruling
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Ruling
Subject: Deduction-repairs
Question
Are you entitled to a deduction for the cost of work undertaken to 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 purchased a residential property.
The property was in good condition when the property was purchased.
The property has been rented for a number of years.
Due to land subsidence and water damage, part of the property has pulled apart and as a result caused damage to the wall of the adjoining room.
You contacted a builder who recommended demolishing and rebuilding part of the property.
There were no changes to the materials used to rebuild part of the property.
No improvements were made to the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-10.
Income Tax Assessment Act 1997 subsection 25-10(3).
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.
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 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 your case, the rebuilding of part of the property is not considered an initial repair or a renewal or reconstruction of the entirety. The work carried out is not considered an improvement and therefore the cost of rebuilding part of the property is not of a capital nature. The work undertaken to rebuild part of the property constitute a repair and restored the previous function of the property.
Therefore, you are entitled to a deduction for the cost of rebuilding part of your rental property under section 25-10 of the ITAA 1997.