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Ruling

Subject: rental property rewiring expense

Question 1

Can you claim a deduction for the full cost for rewiring your rental property solely in order to comply with legislation?

Answer

No.

Question 2

Are you entitled to an annual capital works deduction for rewiring your rental property in order to comply with legislation?

Answer: Yes.

This ruling applies for the following periods

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2011

Relevant Facts

You have a rental property that is over 40 years old, and new legislation in your state requires all rental properties to have Residual Current Devices (RCD's) fitted.

These monitor the flow of electricity from the main switchboard and help prevent electrocution by cutting the electricity supply if an imbalance is detected.

You have been advised that the RCD's cannot be fitted to your property due to the age of the existing wiring.

In order to comply with this legislation it will be necessary to have the property rewired.

The only reason to replace the wiring is to comply with the legislation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Subsection 25-10(3)

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (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.

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 denies a deduction for repairs where the expenditure is of a capital nature.

Work done to meet requirements of a regulatory body -installation of electrical safety switches which necessitate rewiring of the property

As discussed in paragraphs 96 - 99 of Taxation Ruling TR 97/23 expenditure on work that modifies property to satisfy regulatory requirements is allowable as repair expenditure only if the work meets the following conditions:

96. To constitute a 'repair' for the purposes of section 25-10 of the ITAA 1997, work done to meet requirements of regulatory bodies must satisfy the general principles and the various factors discussed in this Ruling. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible under the section. However, work done solely to meet requirements of regulatory bodies is not a 'repair' for the purposes of the section.

97. A 'repair' for the purposes of section 25-10 of the ITAA 1997 is, fundamentally, work done to remedy or restore a defect in, damage to, or deterioration of, property in a mechanical or physical sense.

98. We take the view that 'repair' does not extend to a removal of any impediment to the holding, etc., of property for income purposes arising solely from regulatory requirements. This is clearly demonstrable if the property is otherwise functioning (in a mechanical or physical sense) as intended and, in that sense, is not in a state of disrepair.

99. If Government regulations, for instance, require something to be added to property (e.g., an automatic sprinkler system to a building or an air bag to a motor vehicle), work done to comply with this requirement does not constitute a repair because it is not work done to remedy or make good any defect, damage or deterioration in a mechanical or physical sense. In any event, this is likely to involve capital expenditure and be excluded from section 25-10 of the ITAA 1997.

In your case, there is not a need to replace the wiring from a maintenance point of view, and as such this work is considered an improvement to the building. The expenditure is capital in nature and is not deductible under sections 8-1 or 25-10 of the ITAA 1997. However, the work qualifies for a capital works deduction under Division 43 of the ITAA 1997.

Capital works provisions

Division 43 of the ITAA 1997 allows a deduction for capital expenditure incurred in constructing capital works where a residential property is used for income producing purposes.

The deduction is available on the cost of constructing structural improvements or extensions, alterations or improvements to structural improvements. The annual capital works deduction allowable is 2.5 per cent of the construction expenditure. This deduction is available while the property is being rented or available for rent, up to a maximum period of 40 years.

In your case, you are entitled to claim an annual 2.5 per cent capital works deduction for the cost of rewiring the property to comply with the new legislation. You can commence claiming the annual capital works deduction once the work has been completed.