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Edited version of private advice
Authorisation Number: 1012639110926
Ruling
Subject: Rental repairs
Question
Are you entitled to a deduction for the costs incurred re-flooring rooms in your rental property with polished boards recycled from within the property?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You have owned a rental property for several years.
It came to your attention that the floorcoverings needed replacing.
Upon ripping up the carpet to replace it you found the wooden flooring was in bad shape and needed replacing in some areas.
The existing good boards were rearranged and reused.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10
Reasons for decision
Section 25-10 of the Income Tax Assessment Act (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.
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 Income Tax: deductions for repairs 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 work you carried out is not considered to be an initial repair and was not the renewal or reconstruction of an entirety.
ATO Interpretive Decision Income Tax: Rental property repairs - replacing worn carpet by polishing existing floorboards deals with the deduction for expenditure incurred in removing worn carpets and polishing existing floorboards in a rental property.
Polished floorboards perform substantially the same function as carpet. The materials and processes used in the repair do no more than restore the floor to a functional walking surface.
In your case, the work done re-flooring the property with polished boards is a restoration to the former state. There is no change to the function of the floor, and there is therefore no improvement to the property.
In summary, the expenditure incurred by you is considered to be a repair and is not capital in nature. The expenditure is therefore allowable as a deduction under section 25-10 of the ITAA 1997.