Edited version of your private ruling

Authorisation Number: 1012600550707

Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for the special levy relating to repairs to the flooring of your rental property?

Answer

Yes

Question 2

Are you entitled to claim a deduction for repairing of sewer and water pipes and the replacement of bathroom fittings?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You own part of a commercial complex which was purchased over ten years ago and which was rented out until early 20XX.

Your last tenant vacated in early 20XX at the end of their contract. You could not immediately re-rent the property as you needed to undertake major repairs to the flooring of the complex and to fix pipes which had sheared off due to flooring damage. Raw sewage from the broken pipes was running under the flooring.

The flooring in the complex had started to sag over a number of years from soil subsidence. Due to flooding the subsidence was exacerbated and required immediate intervention with the body corporate engaging a ground engineer to repair the damage.

The work was undertaken in early 20YY with costs being levied equally between the property owners by way of a special levy.

As a result of the flooring damage sewer and water pipes were sheared off. It was found that the damage to the pipes was extensive and large holes were required to be cut in the floor in various locations in the building to gain access to the pipes.

The following work was undertaken in 20YY to replace sewer and water pipes:

· cutting and repairing of large holes in the concrete flooring

· removal and replacing of all bathroom fittings with same or similar product

· pipes removed and replaced with same or similar product

There has been no alteration to the size of the bathroom and no alteration to the works that resulted in a greater efficiency of function of the property. You undertook the work to merely restore the property to its original state before the subsidence.

The property has been listed for rent after the repair work was completed but you have not been able to re-rent the unit after completion of the repairs as the property market is extremely competitive and it is proving difficult to find a suitable new tenant.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

The body corporate of your rental property complex has levied a special levy to fund repairs to the floor. The character of an expense follows the purpose for which the expense was incurred. It follows that if the levy is used to fund expenditure which would be deductible then the contribution made is also deductible.

To determine if the special levy is deductible, we first need to look at what the levy monies were expended upon and the deductibility of those expenses.

Section 25-10 of the ITAA 1997 states expenditure incurred by you for repairs to any premises, or part of premises, plant, machinery, tools or articles held or used by you solely 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, for example, an improvement.

The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. 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.

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.

Case V2 88 ATC 107; AAT Case 4012(1988) 19 ATR 3038 concerned partial underpinning of a rental property caused by excessive drying of the subsoil. It was found that the foundations were restored to their former efficiency in function without the essential character of the foundations being altered. The repairs to the foundations were not capital in nature, as they did not change the nature and character of the building and as such were deductible as repairs.

In your case, you have owned the property for over ten years. The property was first available for rent at the time of purchase and until repairs were undertaken. The need for repairs was occasioned by factors which occurred during the period of income producing. Although the work was extensive, the work undertaken to the floor was to restore it to its original condition.

The work was not considered to be the renewal or reconstruction of an entirety, nor an improvement and is not considered to be an initial repair.

As the essential character of the floor was not altered, the work is therefore considered to be a repair and not capital in nature, and consequently the special levy raised for the cost of the repairs is deductible.

Repairing of sewer and water pipes

You were required to carry out repairs to the sewer and water pipes to your unit as they were damaged as a result of the soil subsidence and concrete sagging. The repairs undertaken required cutting and replacing flooring for holes to gain access to these pipes. The work carried out was to restore the pipes and parts of the floor to its previous function without changing its character.

Thus, the expenditure incurred is deductible under section 25-10 of the ITAA 1997.

Repairs and replacing of bathroom accessories

You were required to remove and replace bathroom accessories. The work was required to allow access to replace damaged pipes as of a result of the floor damage. Items were replaced with same or similar materials without changing its character.

The expenditure incurred is considered to be a repair and deductible under section 25-10 of the ITAA 1997.