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Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for repairs for the expense of replacing the fibro sheeting cladding with colorbond, replacing rusted steel verandah posts with timber posts and work to the pump in your rental property?

Answer:

Yes.

Question 2

Are you entitled to a deduction for capital works for the following?

· new power board,

· piping and electrical conduit,

· wiring, fixed lights and power points,

· replacing slabs with concrete?

Answer:

Yes.

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 over ten years ago.

The external walls of the building were clad with asbestos sheeting.

Recently the sheeting became crumbly and spongy, was fretting and had to be replaced.

Fibro-asbestos sheeting is not now available.

You chose colourbond as a replacement material.

The main cost involved was the removal of the asbestos sheeting and replacing it with colourbond.

There was also other work needed in conjunction with the resheeting.

You had to remove the main electrical board, and when re-sheeting was complete, it was replaced, along with the electrical conduit and wiring, fixed lights and power points, wiring for the hot water system.

You had to replace some plumbing piping while re-sheeting.

The pump solenoid was rewired, seals replaced and the pump relocated.

Due to changes in the walls, plumbing pipes and electrical conduits were altered.

Steel posts which were rusted were replaced with timber posts, and concrete slabs were lifted out and replaced with concrete.

The existing wall components of framework, studs and internal lining were not affected.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10,

Income Tax Assessment Act 1997 Section 43-10,

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

Income Tax Assessment Act 1997 Subsection 43-70(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 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.

The meaning of repairs

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.

The word 'repair' is not defined within the taxation legislation.  Accordingly, it takes its ordinary meaning. Taxation Ruling TR 97/23 states that the word 'repair' 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.

In W Thomas & Co v. FC of T (1965) 115 CLR 58, 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.

Expenditure for repairs to property used to produce assessable income is generally deductible under section 25-10 of the ITAA 1997.  However, the repairs must relate directly to wear and tear or other damage that occurred as a result of renting out your property.

The use of colourbond to replace the asbestos wall cladding constitutes a repair as the change in material did not improve the efficiency or function. The walls have merely been repaired by use of the modern equivalent and restored the original function.

Therefore, you are entitled to a deduction for the cost of replacing the wall cladding of your rental property.

The work to the pump repairs relates directly to wear and tear or other damage that occurred as a result of renting out your property, therefore, you are entitled to a deduction for the work carried out to it.

The timber verandah posts replaced the rusted metal posts, and you are entitled to a deduction for this.

The above items are not capital in nature.

Capital works deduction for power board, piping and electrical conduit, wiring, fixed lights, powerpoints and concrete flooring

Section 43-10 of the ITAA 1997 operates generally to provide a deduction for capital expenditure on capital works used to produce assessable income. A deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. This is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works.

Capital works includes buildings and structural improvements or an extension, alteration or improvement to a building. This includes the addition of the concrete flooring, which are replacing the concrete slabs which were still serviceable.

The power board, piping, electrical conduit, wiring, fixed lights and powerpoints are fixtures and therefore, a part of the building because they satisfy the 'degree of annexation' and the 'object of annexation' tests that are generally applied to determine whether there is a fixture at common law. The power board, piping, electrical conduit, wiring, fixed lights and powerpoints are not in place simply by their weight but are fixed with the intention that they shall remain there indefinitely.

The above are capital in nature and not regarded as repairs. You are entitled to a capital works deduction under Division 43 of the ITAA 1997 for 2.5% of their cost over 40 years, while the property is rented or available for rent.