Edited version of your private ruling

Authorisation Number: 1012500135093

Ruling

Subject: Rental property deductions

Questions and answers:

1. Are you entitled to an immediate deduction for the underpinning of your unit?

No.

2. Is the cost of underpinning your unit included in the cost base?

Yes.

3. Is the remedial work required as a result of the underpinning immediately deductible?

Yes.

4. Are the following repairs and maintenance, carried out concurrently with the underpinning immediately deductible?

· replacement of worn carpet,

· replacement of worn vinyl,

· remedial interior and exterior painting,

· replacement of dislodged tiles,

· replacement faulty fluorescent light

· garden clean up

· replaced inefficient tapware

Yes.

5. Is the cost of replacing the air conditioner to be depreciated?

Yes.

6. Is the cost of replacing the worn curtains with Holland blinds and the two light shades immediately deductible as their total cost each was less than $300?

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased a property in more than 10 years ago in your name only.

Your unit is con-joined to other units.

It was your primary place of residence for some years until you moved out and since then it has been an investment property.

The property had significant slope from the time of purchase which some of the strata group were concerned may be getting worse.

The strata decided to underpin the property during the 2012-13 financial year.

Most other units were affected by the underpinning..

As a result of the underpinning there was some damage to the interior of the unit such as cracked cornices.

There was also a need to straighten the built-in robe that had been installed level on a sloping floor.

The kitchen was most affected as the cupboards and bench required straightening and the tiles replacing.

At the same time you updated the property which had not been done since you moved out and years of tenants had left the property in quite bad shape.

Previously the floor in the living room and bedrooms were carpeted and the kitchen had vinyl floors.

The carpet was badly worn (including burn marks) and you replaced it in the bedrooms.

You replaced the carpet in the living room with vinyl and replaced the vinyl in the kitchen to match the living room.

The interior walls were quite stained and the exterior paint weathered and peeling. You repainted both.

Inspection of the unit showed tiles had fallen off the bathroom wall. This was not as a result of the underpinning. You replaced these tiles.

You replaced the fluorescent light in the kitchen with a new one and this required an electrician to sign off on it.

The garden had become quite overgrown and you required a skip to remove all the tree branches.

The curtains were dirty and worn and you replaced them with blinds. You had some blinds already and only had to outlay less than $300 to buy one more.

You also updated some of the fittings including replacing taps and light fittings as they had become ineffective. You purchased lamp shades which cost less than $50 each.

The air conditioner broke down and you were advised you had to replace it in keeping with the lease with the tenant. You expect to get some money back from the strata insurance. The air conditioning unit cost less the amount received from the strata insurance was more than $300.

During both the underpinning and updated works the unit was tenanted and continues to be so.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-85

Income Tax Assessment Act 1997 Section 110-25

Reasons for decision

Please note all references are to the Income Tax Assessment Act 1997.

Section 25-10 allows an immediate 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.

Subsection 25-10(3) precludes a deduction for repairs where the expenditure is capital in nature.

The Commissioner's views on whether or not expenditure on repairs is immediately deductible are contained in Taxation Ruling TR 97/23 Income tax: deductions for repairs.

You have incurred various expenses both as a result of the underpinning of your unit and as a consequence of being tenanted for a number of years.

Initial repairs - underpinning
Paragraph 59 of TR 97/23 discusses initial repairs which are capital in nature and not immediately deductible.

Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not therefore deductible under section 25-10. The cost of carrying out an initial repair is still not immediately deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred.

The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it was acquired. Expenditure that remedies some defect or damage to or deterioration of, property is capital expenditure if the defect, damage or deterioration:

(a) existed at the time of acquisition of the property; and

(b) did not arise from the operations of the person who incurs the expenditure.

It makes no difference if at the time of acquisition you were aware of the condition of the property, including its need for repair. It is also irrelevant whether the purchase price reflected the need for repairs. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure is capital expenditure and is not deductible under section 25-10.

A residential rental property is a capital gains tax (CGT) asset. Section 110-25 provides that the cost base of a CGT asset consists of five elements. The fourth element of the cost base is capital expenditure incurred to increase or preserve the assets value. The cost of non-deductible initial repairs incurred after acquisition of an asset may be included in this element of the cost base of the asset (Taxation Determination TD 98/19 Income tax: capital gains: may initial repair expenditure incurred after the acquisition of a CGT asset be included in the relevant cost base of the asset).

You state that the property had a significant slope from the time of purchase which some of the strata group were concerned may be getting worse. The defect existed at the time of acquisition and therefore expenditure incurred to remedy this defect by underpinning the unit is an initial repair and is capital in nature. The expenditure incurred to underpin the unit will be included in the property's cost base.

Repairs resulting from the underpinning
TR 97/23 explains that a repair involves a restoration of a thing to a condition it formerly had without changing its character. Repair involves restoration by replacement or renewal of a worn-out or dilapidated part of something but not reconstruction of the whole thing.

As a result of the corrective action taken to remedy the defect, the kitchen cupboards and kitchen bench had to be straightened and some of the tiles replaced. In addition, a built-in robe that had been built on the sloping floor had to be straightened and resulting cracks in cornices required repairing.

These damages were a direct result of the underpinning of the unit and were carried out at a time when the unit was being used for income producing purposes. The repairs were required to restore the kitchen cupboards, benches, tiles, built-in robe and cornices to their former condition, before the underpinning caused them to be uneven.

The expenditure incurred to carry out these repairs is immediately deductible under section 25-10.

Additional works carried out unrelated to the underpinning
Concurrent with the underpinning of the unit, you carried out further repairs and maintenance. There had not been any such work done since you moved out and years of tenants had left the unit in need of repair.

You replaced the badly worn carpet in the living room with vinyl and replaced the vinyl in the kitchen to match. You repainted the interior walls which had become stained and the exterior walls as the paint was weathered and peeling.

Some of the tiles had dislodged from the bathroom wall and you replaced these.

The garden had become overgrown and you needed to hire a skip bin to hold all the debris you removed.

You replaced the fluorescent light in the kitchen as it had become rusty and unreliable. The tap fittings were replaced to restore their efficiency.

The unit was tenanted for the duration of time you were carrying out these repairs.

You are able to claim an immediate deduction under section 25-10 for the expenditure you incurred for these repairs.

Decline in value - air conditioner, Holland blind and light shades
Division 40 deals with deductions for the cost of depreciating assets. Section 40-25 allows you to deduct an amount equal to the decline in value of a depreciating asset which is held for any time during an income year and used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income.

Generally, the amount of your deduction depends on the effective life of the equipment. The effective life of the asset is used in determining the amount of the deduction allowed for the decline in the value of the asset.  You calculate this deduction using either the prime cost method (where the deduction is the same every year until it is written off or disposed of) or the diminishing value method (where the deduction is larger in the earlier years but reduces over the life of the asset.

If the depreciable assets cost less than $300 each then each expense is deductible in full in the income year in which the expense is incurred. 

The blind cost less than $300 and is therefore fully deductible.

You bought light shades for less than $300 and these are also fully deductible.

Your air conditioner cost in excess of $300 and therefore is not immediately deductible. You will need to calculate the amount of your yearly deduction in accordance with the depreciating value over its effective life. Further information on this is contained on our website. Please refer to our publication Rental Properties 2012-13 (NAT 1729).

Disposing of a depreciating asset

Your unit is currently on the market and when it is sold you will no longer own the depreciating assets that will be sold with the property.

When you cease to hold or use a depreciating asset, a balancing adjustment event will occur and you will need to calculate a balancing adjustment amount to either include in your assessable income or to claim as a deduction.

You calculate the balancing adjustment amount by comparing the asset's termination value (the proceeds from the sale of the asset) and its adjustable value at the time of the balancing adjustment event (the time of the sale). (In the income year in which the air conditioner is first used or installed ready for use for any purpose, the adjustable value at a particular time is its cost less its decline in value up to that time.)

If the termination value is greater than the adjustable value you include the excess in your assessable income. This income is shown at item 24 'Other income' on your tax return in the supplementary section.

If the termination value is less than the adjustable value, you can deduct the difference at label D15 'Other deductions' in the supplementary section.