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Ruling

Subject: Rental property deductions

Question 1

Are you entitled to an outright deduction for your share of the costs incurred for the following to your rental property

· replacing cracked and damaged tiles

· replacing water damaged light and fan fittings, powerpoints and switches

· a complete electrical check to existing wiring

· replacing damaged copper feed pipes, PVC pipeware, corroded pipework and waste pipes

· replacing damaged insect screens with insect screens

· replacing damaged security screens with security screens

· painting and

· replacing damaged wall panels in the kitchen?

Answer

Yes.

Question 2

Are you entitled to claim a deduction for your share of capital works for the costs incurred for the following to your rental property

· replacing kitchen cupboards

· replacing the bathroom vanity

· replacing insect screens with security screens and

· replacing electrical wiring?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You own a share in an investment property.

A cyclone damaged your investment property.

The following work has been completed on your property:

Tiles

· removed cracked and damaged tiles to internal floor area of north-west corner and level concrete floor

· removed cracked, loose and unsafe bathroom tiles and installed new tiles, repaired leaks and applied waterproofing compound, applied fibreglass matting and waterproofing compound and installed aluminium angles to stop water entry.

Electrical

· replaced outdated wiring and brought up to standard

· replaced water damaged light and fan fittings and several power points and switches

· Performed complete electrical check to existing wiring

Insect screens

· supplied and installed new insect/security screens to all windows and doors for the whole of the house. Some windows had insect screens on and others had security screens.

Joinery

· removed and replaced water damaged joinery to downstairs kitchen

· replaced downstairs bathroom vanity

· replace damaged wall panels in kitchen

· installed new kitchen cupboards, pantry and bench wall cupboards.

Plumbing

· replaced corroded downstairs cooper feed pipes to northern site of dwelling

· replaced sun damaged PVC pipe-ware to northern side

· replaced downstairs bathroom corroded pipe-work and waste pipes

Painting

· internal downstairs only - prepared ceiling water damaged areas and repainted

· removed scaling and flaking paint to internal downstairs wall prepared and painted

· partial external painting

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Repairs

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, to the extent that the expenditure is not capital in nature.

Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

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. 

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.

It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, 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.

You have incurred expenses for the following work on your rental property in relation to:

· paint and painting costs

· replacing damaged tiles

· electrical check

· replacing damaged electrical fittings

· replacing damaged pipeware

· replacing damaged walls

· replacing insect screens with insect screens and

· replacing security screens with security screens.

The above items are not considered to be capital in nature. You have incurred these expenses to restore your property to a rentable state. Therefore you are entitled to a deduction for the associated repairs.

However where insect screens are replaced with security screens, such work is regarded as an improvement. The security screens have a greater efficiency of function than insect screens. The associated costs are therefore considered a capital improvement rather than a repair and as such are not deductible under section 25-10 of the ITAA 1997. However a deduction is allowable under Division 43 of the ITAA 1997.

Capital works

Section 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

Section 43-10 of the ITAA 1997 requires that:

· the capital works have an area in which capital works is carried out, the work is begun after 30 June 1997, and the expenditure incurred is for capital works that are owned or leased by the taxpayer (section 43-75 of the ITAA 1997);

· there is an amount of construction expenditure incurred that is attributable to the capital works area (section 43-85 of the ITAA 1997); and

· the construction area must be used in a deductible way at some time during the year of income for the purposes of producing assessable income.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which 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).

The kitchen cupboards and bathroom vanity 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 (1960) 106 CLR 377; 12 ATD 197; (1960) 8 AITR 99).

As such the new kitchen cupboards, pantry and bench wall cupboards and bathroom vanity are not deductible as a repair under section 25-10 of the ITAA 1997. However such expenditure is construction expenditure for which a deduction is available under section 43-10 of the ITAA 1997.

You have also incurred expenses for replacing the electrical wiring. Items wired and fixed to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997. These expenses are incurred for items that do not go beyond being part of the setting of an income producing operation. The items form a permanent part of the fabric of the building and are considered to be capital works for Division 43 purposes. The expenditure for the rewiring is capital expenditure for which a deduction is allowable under section 43-10 of the ITAA 1997 at the rate of 2.5%.