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Ruling

Subject: Rental deductions

Question 1

Are you entitled to an outright deduction for the cost of replacing your timber patio at your rental property with a steel one?

Answer

No.

Question 2

Are you entitled to a capital works deduction for the replacement of your timber patio at your rental property with a steel one?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You and your spouse jointly own a rental property.

The property has been available for rent continuously from the time of purchase more than 20 years ago.

A timber patio was attached to the property and had over time deteriorated to the extent that it was literally falling down.

You replaced the timber patio with a steel patio, which was also attached to the property.

The cost of rebuilding the patio with timber or steel was similar, but you chose steel because of the white ants in the area.

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 43-10

Income Tax Assessment Act 1997 Section 43-20

Income Tax Assessment Act 1997 Section 43-25

Reasons for decision

Summary

You are not entitled to an outright deduction for the work completed on your rental property as the expenditure is capital in nature.

The replacement of the timber patio with a steel one is considered to be an improvement and is therefore capital expenditure and qualifies for the 2.5% capital works deduction.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

Section 25-10 of the 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 provides guidelines on the deductibility of repairs. Generally a repair involves a restoration of a thing to a condition and efficiency 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.

TR 97/23 explains (at paragraph 16) that to repair property, improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. 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.

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 that a repair.

In your case you replaced the timber patio at your rental property with a steel patio. You stated the reason you did this, was mainly because of the white ants in the area.

The use of steel in this case is considered an improvement, as a steel structure would not be affected by white ants, giving the patio a greater efficiency of function in the property. Therefore, the costs incurred to replace your patio, are not deductible as a repair under section 25-10 of the ITAA 1997.

You are, however, entitled to a capital works deduction for these expenses under section 43-10 of the ITAA 1997. The relevant rate allowed for your capital works deduction is 2.5% per annum over 40 years while the property is being used for an income producing purpose.