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Edited version of your written advice
Authorisation Number: 1012920070357
Date of advice: 1 December 2015
Ruling
Subject: Deductibility of repairs for a rental property
Question 1
Are you entitled to a repairs deduction under section 25-10 of the ITAA 1997 for the cost of a new kitchen installation in your rental property?
Answer
No.
Question 2
Are you entitled to claim a capital works deduction for cost of a new kitchen installation for your rental property?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 20YY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You own a property that has been a tenanted rental property since 200X.
During the relevant financial year the property was damaged by the tenants.
You bought a new kitchen and engaged a carpenter to complete the installation.
You spent an amount on repairs to restore the property to its original condition.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10
Income Tax Assessment Act 1997 Section 43-10
Income Tax Assessment Act 1997 Section 43-25
Income Tax Assessment Act 1997 Section 43-30
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. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital 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.
Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) indicates that expenditure for repairs to property is a capital nature where:
• the extent of the work carried out represents a renewal or construction 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.
The kitchen is a separately identifiable capital item with its own function. As a consequence, it is an entirety in itself and its replacement is a renewal of the entirety. The costs of the new kitchen are regarded as an improvement and therefore capital in nature.
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 states 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 expenditure is capital in nature and not a deductible repair (Lindsay v Federal Commissioner of Taxation (1960) 106 CLR 377; 12 ATD 197; (1960) 8 AITR 99). However the expenditure is regarded as construction expenditure for which a deduction is available under section 43-10 of the ITAA 1997.