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Ruling

Subject: Rental Expenses

Question

Are you entitled to a deduction for the cost of replacing carpet with tiles in your rental property?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The carpet in your rental property had deteriorated and needed replacing.

In 2011 you replaced the carpet in your rental property with tiles.

You incurred expenses to complete this work.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Subsection 43-25(1)

Reasons for decision

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to a rental property.

To be eligible to claim such an expense you must be holding the property for the purpose of gaining or producing assessable income, and the expenses must not be capital in nature.

Taxation Ruling TR 97/23 discusses the Commissioners views on deductions for repairs. The ruling provides that it ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. 

The ruling provides that a repair involves a restoration of something without changing its character. The significant factor is the restoration of efficiency rather than exact repetition of form or material. For example, in Case 51 (1960) 9 CTBR (NS) 328, it was held that the replacement of a galvanised iron roof with concrete roof tiles was a repair as it did little more than meet a need for restoration. The material in question was designed to perform substantially the same function as that which it replaced.  

The ruling provides that an improvement, on the other hand, involves bringing an object into a more valuable of desirable form, state or condition than a repair would do. An improvement would have other features such as, extending the properties income producing ability, enhancing the property's saleability/market value/extend the expected life of the property, have an additional function and is likely to reduce repair bills.

In your case, you replaced worn carpets with tiles. In replacing the carpet with tiles you restored the floor to perform substantially the same function as the carpet it replaced. The materials and processes used in the repair do no more than restore the floor to a functional walking surface.

It is considered that your replacing carpet with tiles in your rental property does not materially alter the character or functionality of the rental property. Nor does it increase the life of the rental property. Your replacement of the carpets with tiles is therefore considered a repair. Accordingly, the expenditure incurred is deductible under section 25-10 of the ITAA 1997.