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Edited version of your written advice
Authorisation Number: 1012721120152
Ruling
Subject: Rental property repairs
Question
Are you entitled to a deduction for the cost of the work done with respect to the deteriorated wall and windows of your rental property?
Answer
Yes.
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 rental property.
The property has been the rented since it was purchased.
You completed work on the property.
The existing weatherboards, mouldings and timber windows were removed.
New aluminium windows were installed.
Cladding was supplied and installed to replace the weatherboards.
The timber windows were in disrepair.
The weatherboards were old, worn, and in need of replacing.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10
Reasons for decision
Summary
You are entitled to a deduction for the work done with respect to the deteriorated wall and windows of your rental property as the use of different materials is not considered to be an improvement in your case.
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, to the extent that the expenditure is not capital in 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 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.
In your case, it is not considered that the work undertaken is an initial repair or that the windows and wall of the property are entireties. Therefore, it is only necessary to determine if the use of different materials results in an improvement to the property.
According to TR 97/23, the Commissioner accepts that the use of a different material does not necessarily prevent the work from being a repair, provided the work merely restores a previous function to the property or restores the efficiency of the previous function. Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant. A slight increase in efficiency from more modern materials may arise, however where there is a large increase in the efficiency or function because of the materials used, these works would be considered an improvement. Where a new and different function results, this would constitute a capital improvement.
This test was applied by the Board of Review in Case R102, 84 ATC 676. In that case the taxpayer owned a rent producing property consisting of shops and weatherboard flats. Several rotting boards were replaced in one external wall and instead of repainting the boards the taxpayer had the whole wall covered with Celluform cladding. This cladding required little or no maintenance.
The Board held that the cladding of this wall was a repair. The Chairman took the view that there was no structural alteration or improvement in the use of the new cladding. The use of the cladding was to restore efficiency in function. The expenditure was not of a capital nature, despite the fact that the cladding might obviate the need for repainting the wall in the future.
In your case, you used cladding on the exterior walls of the house to replace the existing weatherboards. The new cladding performs the same function as the old weatherboards and the exterior has merely been repaired to the original function of the house's exterior. Whilst the new cladding has possibly reduced the frequency of future maintenance, this slight increase in efficiency is not considered large enough to be an improvement to the property.
Additionally, you replaced the timber windows on your rental property with aluminium windows because they were in a state of disrepair.
It is accepted that, even though the new windows are made of a different material, the replacement of the windows still constitutes a repair as the change in material will not improve the efficiency or function of the property. The windows have merely been replaced by a modern equivalent which has restored their original function.
Therefore, you are entitled to a deduction for the cost of repairing your rental property under section 25-10 of the ITAA 1997.