Edited version of your written advice

Authorisation Number: 1012917757863

Date of advice: 26 November 2015

Ruling

Subject: Rental property expenses

Question 1

Are the following works regarded as deductible repairs

• replacing guttering

• replacing some gyprock and frame

• replacing an internal wall and

• window work on front verandah?

Answer

Yes.

Question 2

Are you entitled to a repair deduction for the remainder of the work carried out on your rental property?

Answer

No.

Question 3

Are you entitled to claim a capital works deduction for the kitchen and bathroom replacement for your rental property?

Answer

Yes.

Question 4

Are you entitled to a deduction for the decline in value for the stove and range hood in your rental property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You and your spouse purchased a rental property several years ago.

The property has been rented for many years.

Tenants vacated the property in March 20XX and on inspection a number of issues were found by the real estate agent who indicated that it would be difficult to find tenants without work being completed. The real estate agent also deemed the condition of the house to be a safety risk.

A builder was contacted and indicated the following repairs were required.

The laminate in the kitchen had peeled back off the bench top due to water penetration near the sink area. This caused the chipboard to swell and the doors to be unaligned. Drawers were also broken. The builder indicated that the entire kitchen would need to be replaced to restore it to a workable condition.

The stove was inoperable and the rangehood's electrical insulation had perished and it was a serious risk to any occupants. There was a severe grease build up and it was deemed an excessive fire risk. The builder indicated that the electrical wiring and appliances required repair and replacement.

The downstairs bathroom had been leaking for some time. The pipes within the concrete were fractured and water was leaking under the tiles and into the water proofing membrane causing damage to the timber frame. There was also a kitchenette on the adjacent wall which had been leaking into the wall cavity causing dampness and rot. The builder indicated that the entire bathroom needed to be removed to access the plumbing which needed to be repaired. The timber frame of the bathroom also needed to be repaired and the shower recess, vanity, toilet and tiles would need to be replaced as they would be damaged upon gaining access to the frame and plumbing. The kitchenette was not replaced. The concrete floor needed to be lifted to gain access to the plumbing.

The guttering around the entire house was blocked and had rotted through. This caused water to enter the wall cavity of the room downstairs and the gyprock and frame needed to be replaced.

An internal wall between the garage and laundry was unstable and needed replacing.

Two windows on the front upstairs verandah were cracked and needed replacing. It was decided to remove the windows and cladding and install a handrail on the balcony as a less expensive option.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Division 40

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 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 you have owned and rented the property for several years, therefore the work is not regarded as initial repairs.

As highlighted at paragraph 40 of TR 97/23, a wall is part of a building, that is, the building is the entirety. As such the replacement of an internal wall is not regarded as a renewal or reconstruction of the entirety. The replacement of the internal wall between the garage and laundry is not regarded as an improvement. Therefore the replacement of the internal wall is a deductible repair under section 25-10 of the ITAA 1997.

Similarly, the work done on the front verandah, guttering and replacing the gyprock and sections of the frame in the downstairs areas are regarded as deductible repairs under section 25-10 of the ITAA 1997.

The kitchen cupboards are regarded as separately identifiable capital items with their own function and are therefore an entirety in themselves.

In your case you have had the entire kitchen and entire bathroom replaced. The substantial amount of work done to the kitchen and bathroom in your rental property 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. 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 kitchen and bathroom in your rental 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.

Therefore a capital works deduction is allowed for the kitchen cupboards, benches and other kitchen and bathroom fixtures including the shower recess, vanity, toilet and tiles and the associated plumbing and electrical work.

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.

A depreciating asset is an asset that has a limited effective life and can be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997).

Stoves and range hoods are regarded as depreciating assets for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction where they are used for income producing purposes.

For further information on how to calculate your allowable depreciation deduction, please refer to the Australian Tax Office's Guide to depreciating assets which is available on the website www.ato.gov.au.

Please note, that as the property is jointly owned, the allowable deductions are apportioned according to your legal ownership.