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Ruling

Subject: Rental deductions

Question

Are you entitled to a deduction for the cost of remediation work on the timber deck of 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

You acquired a property which you used as your principal residence.

In 20XX you rented the property out.

The property has an enclosed timber decking at the back of the house that had been renovated in 200Z.

Towards the end of 20XX and in 20YY you became aware that parts of the covered timber decking had deteriorated. There had been a high amount of rainfall in 20XX which culminated in flooding.

You noticed water had started accumulating on the roof and had started to leak and there was rotting of the timber structure.

The water was not draining away quickly enough from on top and under the decking causing water to settle in that area and the footings and wooden posts supporting the structure were no longer stable. The deck was also rotten in walkway areas

You engaged an architect to provide recommendations for the remediation of the timber decking.

The key findings were;

· There were rotting stumps

· Sections of the veranda had rotted and footings had become unstable

· Concrete slab under decking had cracked and lifted

· Stormwater drainage had deteriorated and was not diverting water away from under the house and deck

· Sections of the handrails and steps had rotted

· Existing soffits were damaged from water leakage

· Roof guttering and downpipes were rusted out

You subsequently engaged a builder to carry out the works to remediate the timber decking and its roof.

The builder deemed that some of the house stumps needed replacement and others needed the footings to be repaired.

The house had to be levelled so that the timber beams attached to the house which supported the roof of the decking were straight for the joists to be attached to. New timber joists were put in to replace the rotted timber to provide a solid base for the new roof.

Rotting timber from sections of the veranda were removed and new timber sections were put in place including post and handrails and decking floor,

A new roof was put in place not only because of water damage but also as it contained asbestos sheeting which had to be removed.

Rusted roof guttering was removed and replaced with equivalent material.

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) states expenditure incurred by you for repairs to premises used by you for the purpose of producing assessable income is an allowable deduction. However, a deduction is not allowable if 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 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.

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 work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or

· the work is an initial repair.

Replacement of a subsidiary part or an entirety

In the case of W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation [1966] ALR 915;115 CLR 58; (1965) 14 ATD 78; 39 ALJR 246; (1965) 9 AITR 710, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building.

In your case, the building itself is considered to be the entirety. The deck is considered a subsidiary part of the building. 

Improvement v repair

The Commissioner accepts that the use of a different material does not necessarily prevent the work from being a repair, provided the work merely restores a previous function to the property. 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.

In your case the work undertaken to your rental property merely restores the efficiency of the previous function. The work is not considered to be an improvement.

Initial repair

If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred.

In your case when you acquired the property it was in good order and condition as it had been renovated recently before you purchased it. You became aware of the damage to property after water started accumulating on the roof and started to leak due to a high amount of rainfall towards the end of 20XX and beginning of 20YY.

As the damage was not evident at the time you purchased the property, the work is not considered an initial repair.

Therefore the work undertaken is not considered to be of a capital nature and you are entitled to a deduction for the repairs to the timber deck of your rental property under section 25-10 of the ITAA 1997.