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Edited version of your written advice
Authorisation Number: 1012880725560
Date of advice: 25 September 2015
Ruling
Subject: Rental property
Question 1
Is the work carried out on your rental property regarded as a deductible repair?
Answer
No.
Question 2
Are you entitled to claim a capital works deduction for the work carried out on your rental property?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 20XX
Year ended 30 June 20XX
The scheme commenced on
1 July 20XX
Relevant facts
You purchased a rental property many years ago.
The property was built many decades ago.
The property has been available for rent for several years.
The property has been subject to mould and it has previously been addressed by cleaning and repainting.
To stop the mould returning and to remedy damage that had been caused you sought the advice of a builder.
Subsequently, extensive work was undertaken to the roof, internal walls, kitchen, bathroom, electrical and plumbing in your rental property. The work cost several tens of thousands of dollars.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-10
Income Tax Assessment Act 1997 Division 43
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 used for income producing purposes, to the extent that the expenditure is not capital in nature.
Taxation Ruling TR 97/23 Income tax: deductions for repairs 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. A repair restores the efficiency of function of the property without changing its character.
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.
It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. That is, where work done to a property goes beyond what is a repair, any expenditure for the work is not deductible.
In your case, substantial work has been done to the roof, internal walls, kitchen, bathroom, electrical and plumbing in your rental property. It is considered that the work carried out has increased the value of the property and made the property into a more valuable or desirable state. The substantial expenditure incurred reduces the likelihood of future repairs. The extensive amount of work carried out goes beyond being a repair and amounts to an improvement to the property. The associated expenses are capital in nature and not 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).
In your case, the costs of the work and improvements to your property are capital in nature. Items fixed to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997 and a capital works deduction is allowed.