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Ruling
Subject: Rental property expenses
Question
Are you entitled to an immediate deduction for the cost of replacing the roof and internal walls on your rental property?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts
You purchased a property that is very old. The property has been available for rent for a number of years.
The rental property is managed by a real estate agent.
Your last tenant who had occupied the property has recently vacated the property.
The property had a specific roof type and the internal walls were of AC sheeting.
Over the past years there have been ongoing problems with the roof leaking usually after a severe storms or heavy rain.
You had regular maintenance carried out over the past years to repair small holes in the roof.
You are now required to replace the roof due to its deterioration and replace the internal walls damaged by the tenant.
There are no structural modifications to be made to either the roof or walls.
You intend to replace the current roof and guttering with colourbond sheeting and you have provided a copy of the builders quote.
The property will be re rented once the work is completed.
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) 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.
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.
The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. 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.
An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' (Lindsay v. FC of T (1961) 106 CLR 377 at 385). Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'.
In your case, the rental property roof had deteriorated and was leaking and the internal walls of the property had been damaged by tenants.
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.
The repairs were not an initial repair as the damage was not present at the time you purchased the property.
The work undertaken to your rental property merely restores the efficiency of the previous function.
Therefore, it is accepted that the replacement of the leaking roof and repairs to the damaged walls constitutes a repair and you are entitled to a deduction under section 25-10 of the ITAA 1997