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Edited version of your private ruling
Authorisation Number: 1012528713599
Ruling
Subject: Repairs
Question 1
Are you entitled to a deduction for the cost of replacing your rental property's roof as a repair?
Answer
Yes.
Question 2
Are you entitled to a deduction for the cost of removing and reinstalling your rental property's air conditioning unit as a repair?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You have owned and rented a property for a number of years.
During the 2012-13 financial year the property's roof developed leaks due to severe inclement weather.
The roof and guttering was replaced using modern day equivalent materials.
To enable the roof to be replaced, the existing air-conditioning unit was removed and then reinstalled after the work was completed.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10
Income Tax Assessment Act 1997 Section 40-25
Reasons for decision
Replacement of roof and guttering
Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to a property which is used solely to produce assessable income. However, subsection 25-10(3) of the ITAA 1997 denies a deduction for repairs where the expenditure is of a capital nature.
Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. For work to be deductible as a repair it must not be:
· an initial repair
· an improvement, or
· the replacement of an entirety.
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.
An initial repair is a repair performed to rectify a defect which existed at the time the property was acquired.
Paragraph 16 of TR 97/23 explains that to repair property improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.
While a repair restores the efficiency of the function of a property without changing its character, an improvement goes beyond this and provides a greater efficiency of function in the property. An improvement usually brings the property into a more valuable or desirable form or condition than a repair would and generally changes the character of the property.
Where the extent of the work carried out represents a renewal or reconstruction of an entirety, rather than a replacement of subsidiary parts of a whole the expenditure will be capital in nature and not deductible under section 25-10 of the ITAA 1997.
An entirety is defined as something separately identifiable as a principal item of capital equipment (Lindsay v. FC of T (1961) 106 CLR 377).
TR 97/23 provides that in circumstances where repairs are carried out at the same time as improvements, and it is possible to identify and quantify those parts of the work that constitute repairs, the cost of the repair work will be deductible.
In your case, you have replaced a damaged roof with its modern equivalent on a building which you use to earn rental income.
It is considered that the replacement of the roof and guttering is not an initial repair, not the replacement of an entirety and does not go beyond restoring the efficiency of function of the roof.
Therefore, you are entitled to a deduction for the full cost of replacing the roof and guttering on your commercial rental property.
Removal and reinstallation of air-conditioning unit
A depreciating asset is an asset that has a limited effective life and can be expected to decline in value over the time it is used.
Section 40-25 of the ITAA 1997 allows you a deduction equal to the decline in value of a depreciating asset to the extent to which it is used to produce assessable income or is installed ready for use for that purpose.
Air-conditioning units are depreciating assets. Their installation and removal costs are normally included in calculating the cost of the air-conditioner.
However, in this situation, the costs of removing and reinstalling the air-conditioning unit are considered to be part of the cost of replacing the roof. This is because the roof could not be replaced without the air-conditioning unit being removed. The costs are incidental and relevant to replacing the roof.
Therefore, these costs are included in calculating the total cost of repairing the roof on your commercial rental property.