Edited version of private advice

Authorisation Number: 1012647264322

Ruling

Subject: Property repairs

Question 1

Are you entitled to a deduction for the costs incurred repairing the fence and replacing the bathroom basin at your rental property?

Answer

Yes.

Question 2

Are you entitled to a deduction for the costs incurred in relation to your rental property for

• Replacing the carpet

• Replacing the floor tiles

• Replacing the oven, cooktop, rangehood and dishwasher

• Replacing lights

• Replacing broken exhaust fans

• Installing a new basin in toilet

• Changing the locks

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You own a property that was your main residence.

You bought another property.

You moved into the second property and rented out your first property.

Your tenants decided to vacate.

As your property was in need of repair you decided to fix it up before putting it back on the rental market.

Due to a change in circumstances when the property was ready to go on the rental market you moved back into the property.

You completed the following work:

• Carpet - replaced the carpet. There is no other carpet in the property.

• Replaced all the floor tiles.

• Replaced a section of the fence

• Replaced the oven, cooktop, rangehood and dishwasher

• Replaced lights - lights had become rusted and an electrician advised they needed to be replaced

• Replaced broken exhaust fans

• Installed a basin in the toilet

• Replaced a damaged basin in the bathroom

• Changed the locks due to a change in residents.

When the property was first rented all items were in acceptable condition and they deteriorated while the property was being rented.

You received rental income in the income year the works were undertaken.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Section 25-10 of the Income Tax Assessment Act 1997 (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 cost of repairs to a property after cessation of income producing use is covered in Taxation Ruling IT 180 Repairs to property carried out after cessation of income production (IT 180). Paragraph 4 of IT 180 states that a deduction may be allowed for the cost of repairs to property providing:-

• the necessity for the repairs can be related to a period of time during which the premises have been used to produce assessable income of the taxpayer, and

• the premises have been used in the production of such assessable income of the year of income in which the expenditure is incurred.

It does not matter what use the property is put to after the repairs are carried out so long as the costs associated with the repairs are incurred in the same year as assessable income has been earned from the property.

The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co 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 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 (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.

In your case, the work undertaken in repairing the fence and replacing the bathroom basin is considered to be a repair and not capital in nature. Therefore you are entitled to a deduction under section 25-10 of the ITAA 1997 for these costs.

Capital expenses

Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

A deduction is only available for the number of days that a property is rented, or available for rent, in any income year from the date that the works are completed.

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

The following items are considered to be capital improvements.

• Replacement of the lights

• Inserting new basin in the toilet

• Changing the locks

• Replacement of floor tiles

In your case, you carried out the capital works on your rental property after the income producing function of the property had ceased. You are therefore not entitled to a deduction for the capital works as the property is no longer available for rent.

Decline in value (depreciation)

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 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). 

The following items have an effective life:

• oven

• cooktop

• rangehood

• dishwasher

• carpet

However, as these were installed after the income producing function of the property had ceased, you are not entitled to a deduction for the decline in value under section 40-25 of the ITAA 1997.