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Ruling

Subject: rental property repairs

Question

Is the roof replacement regarded as a deductible repair?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You purchased an investment property in 2009.

At the time it was not apparent that the asbestos fibro roof of the house had any problems.

When the house was purchased, you were advised that the roof had previously been sealed with a treatment which was still under warranty. This treatment occurred in 2006.

However, after the end of a long dry season, the tenants in the rental property notified you in 2010 that the roof was leaking, following a series of stormy wet weather.

You inspected the roof and could not discover where the damage to the asbestos fibro roof was located.

For the next six months, you employed a series of local tradesmen who each attempted to repair the roof, but all repairs failed.

Rain continued to seep inside the house causing mould inside the cupboards and on the main bedroom walls.

You were advised that the condition of the roof was beyond repair and the only solution was to replace the roof.

In 2011, you incurred costs to replace the old damaged asbestos fibro roof with a Colourbond metal roofing.

The property was continually rented during the roof work and replacement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

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, 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. A repair restores the efficiency of function of the property without changing its character.

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 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.

As highlighted at paragraph 40 of TR 97/23, a roof is part of a building, that is, the building is the entirety. As such the replacement of the roof is not regarded as a renewal or reconstruction of the entirety.

Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant.

A colourbond roof performs substantially the same function as the asbestos roof. The materials and processes used in the repair do no more than restore the roof to an acceptable condition. Replacing a leaking asbestos roof in a rental property with a colourbond roof does not materially alter the character or functionality of the rental property. Therefore the replacement of the asbestos roof with a colourbond roof is not regarded as an improvement.

According to paragraph 125 of the TR 97/23, a repair after acquisition of property is an 'initial repair' if the 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.

The rental property had an old asbestos roof when purchased. Following stormy weather 12 months after purchase, you were notified that the roof was leaking. It is accepted that the defects in the roof emerged during the income producing use of the property after purchase. The replacement of the roof is therefore not an initial repair.

We conclude that the replacement of the roof is not an initial repair, is not the replacement of an entirety, is not an improvement and is in respect of an asset used in the production of assessable income. Hence the replacement of the asbestos roof with a colourbond roof is a deductible repair under section 25-10 of the ITAA 1997.