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Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for repairs to your rental property?

Answer

Yes.

Question 2

Are you entitled to a deduction for capital works in relation to the kitchen, bathroom and laundry cupboards?

Answer

Yes.

Question 3

Are you entitled to a deduction for decline in value of the carpet?

Answer

Yes.

Question 4

Are you entitled to a deduction for travel?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You own a property where you lived until November 2010.

You moved to another city.

Your employer indicated that they would find a tenant for your property after you moved.

It was agreed that the tenant would take up residence in the first two weeks of January 2011. However before this could happen, the house was affected by the January floods.

You could not claim insurance as the property was in a flood area.

You incurred expenses for the following:

Stripping plaster from walls and replace

Supply of gyprock and timber 

Supply and install kitchen, bathroom and laundry cupboards

Supply and install carpet

TV cable replacement

General carpentry to fix walls doors

Various small items used in repairs 

Travel to inspect progress of repairs

The tenant moved in once the repairs had been completed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Subsection 43-25(1)

Income Tax Assessment Act 1997 Subsection 40-25(1)

Income Tax Assessment Act 1997 Section 8-1

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. 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 capital.

In your case, your property was available for rent at the time that the damage occurred. Therefore, expenses for repair of the damage are deductible. These expenses are:

· Stripping plaster from walls and replace

· Supply of gyprock and timber 

· TV cable replacement

· General carpentry to fix walls doors

· Various small items used in repairs 

· Kitchen, bathroom and laundry cupboards

Division 43 of the ITAA 1997 provides for capital works attributable to a construction expenditure area that is owned or leased by the taxpayer and used during the income year for the purposes of producing assessable income. Capital works includes buildings and structural improvements and also extensions, alterations or improvements to buildings and structural improvements.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works that began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997).

Where an asset is replaced in its entirety, then the whole cost of the replacement is capital.  The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment', 'a physical thing which satisfies a particular notion', and 'not necessarily the whole but substantially the whole of the property under discussion'.

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

The kitchen, bathroom and laundry cupboards are separately identifiable items with their own function. As a consequence, they are an entirety in themselves and their replacement is a renewal of the entirety. The expenditure is capital in nature (Lindsay v. Federal Commissioner of Taxation (1961) 106 CLR 377; [1961] HCA 93).

The kitchen, bathroom and laundry cupboards are fixtures and, therefore, a part of the building because they satisfy the 'degree of annexation' and the 'object of annexation' tests that are generally applied to determine whether there is a fixture at common law. The kitchen cupboards, bathroom and laundry are not in place simply by their own weight but are screwed to the walls of the building and they are fixed with the intention that they shall remain there indefinitely.

The expenditure on the kitchen, bathroom and laundry cupboards is construction expenditure for which a deduction is available at the rate of 2.5%.

Carpet

A depreciating asset is an asset with a limited effective life and which can reasonably be expected to decline in value over the period it is used. Carpets are depreciating assets.

Subsection 40-25(1) of the ITAA 1997 provides that you can deduct an amount equal to the decline in value of a depreciating asset you held in an income year from the time it was installed ready for use.

Taxation Ruling TR 2010/2 states that the effective life of carpet is ten years.

Therefore, you are entitled to a deduction for the decline in value of the carpet.

Travel

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.

You are entitled to a deduction for the cost of flights to inspect the repairs to your rental property as they were incurred in connection with gaining income from the investment property.