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Ruling
Subject: Rental deductions
Question
Can you claim an immediate deduction for installing a termite management barrier at your rental property?
Answer
No
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You purchased a rental property in 2012.
A pre-purchase post examination had revealed no evidence of live termites at the property but did show some damage to a stump and it was recommended you install a termite management barrier.
This barrier was installed in 2012.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10
Income Tax Assessment Act 1997 Subsection 25-10(3)
Reasons for decision
Summary
The installation of a termite barrier is an initial repair to the rental property and you are therefore not entitled to an immediate deduction.
Detailed reasoning
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. However, subsection 25-10(3) of the ITAA 1997 denies a deduction for repairs where the expenditure is of a capital nature.
Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a 'repair' involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.
Initial repair
Paragraph 72 of TR 97/23 states repair expenditure is deductible where it is incurred during the period the property is 'held, occupied or used' for bona fide income producing purposes and is attributable either to damage that occurs during income producing use of the property or to defects that emerge suddenly during that time.
However, expenditure incurred on an initial repair after the property is acquired, where the expenses are incurred in remedying defects or deterioration in existence at the time of purchase, is considered capital in nature. These expenses remain capital in nature even when some income is produced by the property prior to the initial repairs being incurred (paragraph 59 of TR 97/23).
Paragraphs 60 and 61 of TR 97/23 state that the main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Where expenditure remedies damage, defects or deterioration to the property which existed at the time of purchase of the property and did not arise from the income producing activity, the expenditure is capital in nature.
It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. Expenditure on initial repairs lacks a connection to the income producing activities of the property and is considered an additional cost of acquiring the property or an improvement in the quality of the property you acquired.
In your case a pre-purchase post examination had revealed no evidence of live termites but did show some damage to a stump and it recommended the installation of a termite management barrier.
This damage did not occur at a time you held or used the property for an income producing purpose. As such the work to install the barrier is an initial repair and the cost involved is capital expenditure.
Therefore, you are not entitled to an immediate deduction under section 25-10 of the ITAA 1997 for replacing the roof on your rental property.