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Edited version of your written advice
Authorisation Number: 1012776332437
Ruling
Subject: rental property
Question 1
Are you entitled to a repairs deduction for expenses incurred on your rental property to make good ceiling and termite damage?
Answer
Yes.
Question 2
Are you entitled to a repairs deduction for the other items which are capital in nature?
Answer
No.
Question 3
Are you entitled to claim a capital works deduction for the expenditure incurred on the tub, insulation batts, whirlybirds, carport door and new taps for your rental property?
Answer
Yes.
Question 4
Are you entitled to a deduction for the decline in value for the air conditioner and fans?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You have a rental property which has been rented for several years.
The glue and nails had begun to fail in holding the ceiling of your property.
The builder suggested a complete new ceiling.
When removing the ceiling it was noticed that other damage from termites was evident in the walls.
Work to repair the damaged walls and ceilings was done.
You also incurred expenses to fit a new laundry tub, new tap ware, new ceiling insulation bats, new whirlybirds and a new access door to the carport. You also installed new fans and a new air-conditioner.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-10
Income Tax Assessment Act 1997 Division 40
Income Tax Assessment Act 1997 Division 43
Reasons for decision
Repairs
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.
Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean 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 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.
TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.
In your case, the work done to replace the damaged walls and ceiling used similar material to what was previously there. The property is restored to its original condition, function and appearance. The work is not regarded as an improvement. Also, the work does not constitute the replacement of an entirety as the walls and ceiling are merely parts of the entirety being the building. It is also not an initial repair as the damage occurred since you acquired the property. Therefore the associated expenses are deductible repairs under section 25-10 of the ITAA 1997.
Capital works
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.
Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997).
The costs of the new tub, taps, insulation batts, whirlybirds and carport door are regarded as an improvement and therefore capital in nature. Therefore the associated expenses are not deductible as repairs. However a capital works deduction is allowed under Division 43 of the ITAA 1997.
Depreciating assets
Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose.
The air-conditioner and fans are regarded as depreciating assets for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction when it is used for income producing purposes.