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Ruling

Subject: Rental property maintenance

Question 1

Are you entitled to a repair deduction for part of the work carried out on your rental property?

Answer

Yes.

Question 2

Are you entitled to a 2.5% capital works deduction for part of the work carried out on your rental property?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have owned and rented a property for over 25 years. The property was vacant for some months so that repairs could be undertaken.

You replaced old plaster ceilings which had partially collapsed in some bedrooms, replaced the bathroom vanity, repaired bedroom and kitchen walls, repaired a section of damaged flooring, painted the entire interior of the house, and oiled and varnished an external timber balcony floor.

In another bedroom you replaced a collapsed ceiling with a new false timber frame ceiling which was lower than the original ceiling.

Reasons for decision

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.

The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co Pty Ltd 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.

Taxation Ruling 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 or improvement

Paragraph 45 of TR 97/23 distinguishes between a 'repair' and an 'improvement' to property and considers the effect that the work done on the property has on its efficiency of function.

If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property.

In your case, you have replaced some plaster ceilings and carried out repairs to bedroom and kitchen walls, a section of damaged flooring, painted the interior and oiled and varnished the external balcony timber floor of your rental property.

You have not renewed or reconstructed an entirety, and the work you have undertaken is not an improvement or an initial repair.

This work will restore the property to its original condition, function and appearance without changing its character. The expenditure incurred in doing this is deductible under section 25-10 of the ITAA 1997.

New timber framed ceiling

You have advised that this item is an improvement that you have made to your property and no information has been provided which suggests otherwise. Therefore, a repairs deduction is not allowed with respect to this item.

Also, this item forms part of the building and is not plant. Therefore, it is not a depreciating asset for which a decline in value deduction can be claimed.

However, as it is an improvement to the building, a 2.5% capital works deduction is allowable under Division 43 of the ITAA 1997.

Replacement of bathroom vanity unit

The vanity unit is a separately identifiable item with its own function. As a consequence, it is an entirety in itself and its replacement is a renewal of the entirety. As the expenditure is capital in nature, a repairs deduction is not allowable.

Although the vanity unit is a separately identifiable item, it is a fixture and, therefore, a part of the building because it satisfies the 'degree of annexation' and the 'object of annexation' tests that are generally applied to determine whether there is a fixture at common law. A vanity unit is not in place simply by its own weight but is fixed to the building. Also, it is installed with the intention that it shall remain there indefinitely.

The role and function of the vanity unit in relation to the income producing activities does not go beyond being part of the setting of an income producing operation when it is installed in a residential rental property. As a result, it is not plant.

The expenditure on the vanity unit is construction expenditure for which a 2.5% capital works deduction is available under Division 43 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10,

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

Income Tax Assessment Act 1997 Section8-1,

Income Tax Assessment Act 1997 Subsection 40-45(2) and

Income Tax Assessment Act 1997 Division 43.