Edited version of private advice

Authorisation Number: 1012628102803

Ruling

Subject: Rental property repairs

Question 1

Are you entitled to a repairs deduction for the expenses incurred for retiling, replastering and painting the walls and floor and replacing the carpet with another type of flooring?

Answer

Yes.

Question 2

Are you entitled to claim a repairs deduction for the expenses incurred moving the clothes drier and providing it with dedicated ventilation?

Answer

No.

Question 3

Are you entitled to a capital works deduction for the bath, vanity unit and laundry trough?

Answer

Yes.

Question 4

Are you entitled to claim a deduction for the decline in value for the stove and rangehood?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You purchased a rental property over ten years ago.

Your tenants vacated the property as they considered the apartment to be uninhabitable due to the excessive level of mould and water saturation problems.

A property inspection report identified the case as water leaking in the bathroom.

As a result you had to refit the bathroom, carpet and kitchen.

The failure of the bath drain resulted in a massive spread of water. As a result the following work was undertaken:

• All wall and floor tiles had to be removed so that replacement waterproofing could be re-laid

• The bath, vanity unit and laundry troughs were totally rotten and had to be replaced

• The carpets in a number of rooms were damaged. The water damaged carpets were replaced with another type of flooring.

• The walls in a number of rooms had to be replastered and painted.

• The stove and rangehood had both shorted out due to excess moisture and were replaced.

• The inspection report recommended that the clothes drier be refitted and provided with dedicated ventilation

You have not received an insurance payment.

A special levy has not been raised by the body corporate.

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 43-10

Reasons for decision

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs 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.

The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, 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 deficiency in function rather than the exact repetition of form or material that is significant.

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) indicates that expenditure for repairs to property is a capital nature where:

• the extent of the work carried out represents a renewal or construction 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.

Replacement of a subsidiary part or entirety

TR 97/23 paragraph 38 considers that a property is more likely to be an entirety if:

• the property is separately identifiable as a principal item of capital equipment; or

• the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or

• the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

• the thing or structure is a 'unit of property' as that expression is used in depreciation deduction provisions of the income tax law.

According to paragraph 39 of the TR 97/23, property is more likely to be a subsidiary part rather than an entirety if:

• it is an integral part of some larger item of plant; or

• the property is physically, commercially and functionally an inseparable part of something else.

In the W Thomas & Co case, 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.

Repair or improvement

Paragraph 45 of TR 97/23 distinguishes between a 'repair' and an 'improvement' to property.

Paragraph 16 of TR 97/23 states 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.

Some of the factors pointing to an improvement rather than a repair are whether:

• the modification work has effected an improvement

• there is greater efficiency of function of the property

• there is an increase in the value of the asset

• the expenditure reduces the likelihood of future repairs.

In your case, you have removed and replaced the wall and floor tiles in the bathroom, replaced carpet with a floating laminate floor and replastered and painted the walls in the other rooms of the property. It is accepted that the work undertaken is not an improvement, does not replace an entirety, is not an initial repair and is restoring the efficiency of function to what was in place prior to the damage. Therefore, you are entitled to a deduction for the above work as it is considered to be a repair.

You have also moved a clothes drier in order to provide it with dedicated ventilation. By providing the clothes drier with dedicated ventilation you have improved the ventilation and reduced the potential for future moisture damage to the ceiling and ceiling light. It is considered that the work undertaken constitutes an improvement and consequently you are not entitled to a deduction for the expenses incurred. However you will be entitled to include the construction costs in your claim for capital works

Capital works

Section 43-10 of the ITAA 1997 operates generally to provide a deduction for capital expenditure on capital works used to produce assessable income. Capital works includes buildings and structural improvements or an extension, alteration or improvement to a building.  A deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. This is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works.

A capital works deduction is generally claimed at a rate of 2.5% over 40 years.

In your case, the bath, vanity unit and laundry trough are considered to be a renewal of an entirety and not deductible as a repair. However you are entitled to a 2.5% capital works deduction as they form part of the premises and are not plant.

The construction costs in relation to better ventilation for the clothes drier may be included in your claim for capital works.

Decline in value

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997).

In your case, the stove and rangehood are depreciating assets. Therefore you are entitled to a deduction for the decline in value of these items.