Edited version of your written advice

Authorisation Number: 1012730856023

Ruling

Subject: Rental property repairs

Question 1

If you completely renovate your bathroom at the time you undertake repairs, are you still entitled to a deduction for the cost of the repairs?

Answer

Yes.  

Question 2

If you need to pay for accommodation for your tenants while the work is being carried out, are you entitled to a deduction for the cost of accommodation?

Answer

Yes.  

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You have owned a rental property for a number of years.

Your agent advised you that there had been water leaking causing foundation/flooring damage.

You have obtained a quote as follows:

• To remove the floor and wall tiles on the shower and bath

• To alter the plumbing to create a shower over the bath

• To repair the floor to make it sound and install cement sheeting

• To cement sheet walls

• To seal walls and floor with a membrane and make ready for tiles

• To supply white floor and wall tiles and install

• To reinstall toilet pan and basin in an approved manner

• To supply and install shower screen

As the costs involved are so high, you are considering undertaking a full renovation which includes replacing all fixtures and fittings.

You may have to move your tenants into motel accommodation for the short period that the bathroom is being renovated.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 43-25

Income Tax Assessment Act 1997 Section 40-25

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Section 25-10 of the Income Tax Assessment Act 1997 allows a deduction for non-capital expenditure incurred on repairs to premises or depreciating assets held or used for the purpose of producing assessable income.

Division 43 of the ITAA 1997 allows a deduction for construction expenditure on capital works. Paragraph 43-25(2)(b) of the ITAA 1997 states that if the construction expenditure commenced after 16 September 1987 the rate of deduction would be 2.5% per annum.

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.

Taxation Ruling TR 97/23 Income tax: deductions for repairs, explains the circumstances in which deductions for repairs are allowable, and states that the word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. 

TR 97/23 states that the character of a repair does not necessarily change because it is carried out at the same time as an improvement. It is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation, is a repair. That is, if individual parts of the total project can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible. It must be possible to segregate the cost of the repairs actually effected from the capital cost of the improvements.

However, if repair work is inextricably bound up with work of an improvement nature, and the repair work cannot be separately segregated and its cost accurately quantified independently from the cost of the improvements, the cost of the entire work is regarded as being of a capital nature and not deductible.

In your case, you had water damage to the bathroom. You have obtained a quote for repairs to the bathroom. However, as the cost is already high, you intend doing a complete renovation of the bathroom.

As the quote you have obtained accurately quantifies the cost of the repair, you are entitled to a deduction for this amount. The additional cost to complete the renovation is considered to be capital and may be deductible as either capital works or decline in value.

Accommodation

As the cost of accommodating your tenants while the repairs are being undertaken is incurred in producing your income from the rental property, you are entitled to a deduction.