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Edited version of your written advice
Authorisation Number: 1012826064924
Date of advice: 18 June 2015
Ruling
Subject: Rental property repair
Question
Are you entitled to a repairs deduction for repairs to air conditioning units installed on your commercial investment property?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You purchased an investment property a number of years ago.
The investment property has been tenanted with the same tenant since for more than 10 years.
You have received rental income from the property.
The air conditioners installed on the property developed a fault and needed repairing in the relevant financial year.
You replaced the air conditioner compressors only.
When purchasing the property the air conditioners were in good working order.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10
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 or a depreciating asset 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.
Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.
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 replacement of the air conditioner compressors is considered to be a deductible repair. Therefore a deduction is allowable under section 25-10 of the ITAA 1997.