Edited version of private advice

Authorisation Number: 1012679204116

Ruling

Subject: Rental Property - Deductions (repairs and capital works)

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 capital works?

Answer

Yes

Question 3

Are you entitled to a deduction for decline in value of a depreciating asset?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You own a unit that was your main residence.

You and your ex-partner bought a house together in 20XX.

You moved into this house and rented out your unit.

In 20YY your tenants decided to vacate.

You received rental income until the tenants moved out in 20YY.

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

As your unit was in need of repair you decided to fix the unit to bring it to a safe and liveable standard before putting it back on the rental market.

You completed the following work:

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

• Replaced all the floor tiles as these were cracked and broken.

• Replaced the fence along two sides of the property. The fence extends into the third side of the property.

• Replaced the oven, cooktop, rangehood and dishwasher. The oven and cook top were not working properly and could have been dangerous.

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

• Replaced broken exhaust fans

• Installed a new basin in the toilet

• Replaced a cracked basin in the bathroom that couldn't be waterproofed.

• Changed the locks due to the expected change in tenants.

Once these items were fixed, you had the property back on the rental market. This was within a month from when your tenant moved out.

Because of personal matters, you could only rent the unit for a short period of time pending the sale of the house jointly owned. This made it hard to get a tenant.

An offer was made on your house in and the sale of the property occurred in within X months.

The unit continued to stay on the rental market but you were unsuccessful in obtaining tenants for short term lease.

You took the unit off the rental market and moved into it with your child.

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

Summary

You are entitled to a repairs deduction for the costs incurred repairing the fence and replacing the bathroom basin.

You are entitled to a capital works deduction and a decline in value deduction for the remainder of the work undertaken as these were installed during the year when the income producing function of the property had not ceased.

Detailed reasoning

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 a deduction under section 25-10 of the ITAA 1997 is allowable for repairing the fence and replacing the bathroom basin.

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 works.

• 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 your tenants moved out. You worked on fixing the unit to bring it to a safe and liveable standard. You put the property back on the rental market within a month from your tenants moved out. The income producing function of the property had not ceased. You are therefore entitled to a deduction for the capital works as the property was available for rent in the income year from the date that the works were completed.

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

As these were installed during the year when the income producing function of the property had not ceased, you are entitled to a deduction for the decline in value under section 40-25 of the ITAA 1997 for the period it was installed in the property ready for rental.