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Ruling

Subject: Rental property repairs

Question 1

Is the trust entitled to a deduction for repairs to the roof of the rental property?

Answer

Yes

Question 2

Is the trust entitled to a deduction for repairs to the wall cladding of the rental property?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The trust owns a rental property.

The trust purchased the property in the 2010-11 income year.

The property is currently leased to a tenant.

At the time of purchase the roof was not defective or damaged.

At the time of purchase the wall cladding was not defective or damaged.

Over the last six months, the area in which the rental property is located has been subjected to wild weather of torrential rain and severe wind.

The roof of the property is damaged and worn and is rusted and leaking in many areas.

The existing corrugated tin roof sheets will be removed and replaced with Colorbond custom orb sheeting.

The walls of the property are damaged and worn; they have deteriorated significantly over the last six to twelve months as a result of the weather.

The existing painted galvanised wall cladding will be removed and replaced with Colorbond custom orb.

Relevant legislative provision

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

Summary

The replacement of the roof sheeting and wall cladding to the property constitute a repair. The trust is therefore entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed Reasoning

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.

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. 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.

Initial repair

A repair after acquisition of property is an 'initial repair' if repair was due when the property was acquired, in the sense that there was a need for repair to restore or maintain the property's efficiency of function. In other words, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended. Initial repairs are capital in nature and therefore not deductible under subsection 25-10(3) of the ITAA 1997 (paragraph 59 TR 97/23).

Use of different materials

If expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue (paragraph 48 TR 97/23).

If the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. However, if the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement.

Renewal or replacement of entirety

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 or a wall is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'.

Application to your circumstances

In this case, the trust purchased the income producing property the 2010-11 income year, at which time the roof and wall cladding were not damaged or defective. As a result of the age of the building and severe weather experienced over the past six to twelve months, the condition of the roof and wall cladding has deteriorated and they now require repair. The work is not considered to be an initial repair.

Colorbond custom orb sheeting will be used to replace the corrugated tin roof and the painted galvanised wall cladding. It is considered that Colorbond custom orb is the modern equivalent of these materials, and the use of the Colorbond will not alter the efficiency or function of the property.

The replacement of the roof sheeting and wall cladding is considered to be the replacement of subsidiary parts of the whole property. The frame or overall structure of the property will not be altered, therefore the works are not considered to be a replacement of an entirety.

Accordingly, a deduction for the repairs to the roof and wall cladding is allowable under section 25-10 of the ITAA 1997.