Edited version of your written advice

Authorisation Number: 1013123049617

Date of advice: 11 November 2016

Ruling

Subject: Rental property expenses - repairs

Question 1

Are you entitled to an immediate repairs deduction for the cost of the following work done to your rental property:

● removing and replacing tiles in the kitchen

● removing and replacing the shower screen

● repair leaking taps to shower

● replacement of bathroom accessories

● replacement of mirror

● replacement of toilet cistern and seat

● replacement of showerhead

● supply and installation of new floorboards; and

● painting.

Answer

Yes.

Question 2

Are you entitled to a decline in value deduction for:

● kitchen sink, new oven, cooktop and rangehood

● oyster lights

Answer

Yes.

Question 3

Are you entitled to a capital works deduction for the cost of:

● new laminated kitchen and bench top

● new wiring and powerpoints

● new vanity unit

● new plumbing in kitchen

● bathroom and kitchen taps; and

● new built in wardrobes

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased a rental property in 20ZZ which was constructed in 1970's. When you purchased the property the bathroom and kitchen were still in original condition. The property has always been used to produce assessable income.

Your tenant recently vacated the property. Your managing agent advised that significant work was required to bring the property back to a standard where it could be let. The majority of the work required is concentrated on the kitchen and bathroom.

You propose to undertake the following:

● remove and replace old kitchen tiles

● remove all kitchen cupboards and benchtop and replace

● install new oven, rangehood, cooktop and kitchen sink, and undertake associated plumbing and electrical work

● install new powerpoints to kitchen

● install new mixer tap

● remove and replace vanity unit in bathroom

● replace damaged shower screen

● replace mirror

● install new bathroom accessories

● install new toilet cistern and seat

● repair leaking taps in shower

● install new showerhead

● replace old lighting wit new oyster lights

● install new floorboards to hallway and lounge room

● install new built in wardrobes to both bedrooms

● painting and patching of walls.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Division 43

Reasons for decision

You are entitled to a deduction for the cost of repairs to premises used for income producing purposes providing the expenditure is not of a capital nature (section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).

The word repair is not defined within the tax legislation and takes its ordinary meaning. Repair involves a restoration of a thing to a condition it formerly had without changing its character (W Thomas and Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710).

Expenditure for repairs is of a capital nature where:

● the work is an initial repair

● the extent of the work carried out represents a renewal or construction of the entirety, or

● the work results in a greater efficiency of function, therefore representing an improvement rather than a repair.

Expenditure incurred to remedy defects, damage or deterioration in existence at the date of acquisition of property is an initial repair. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price reflected the need for repairs.

An entirety is defined as something separately identifiable as a principal item of capital equipment (Lindsay v. FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201).

An improvement provides a greater efficiency of function and involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life. If the work done restores a previous function, or restores the efficiency of the previous function, it does not matter that a different material is used.

In your case, the following works are considered repairs:

● removing and replacing tiles in the kitchen

● removing and replacing the shower screen

● repair leaking taps to shower

● replacement of bathroom accessories

● replacement of mirror

● replacement of toilet cistern and seat

● replacement of showerhead

● supply and installation of new floorboards; and

● painting.

These works were not initial repairs or replacements of entireties; nor were they improvements. The works simply restored the property to its original condition without changing its character. As such, you are entitled to a repairs deduction under section 25-10 of the ITAA 1997 for the cost of these works.

You are not entitled to an immediate deduction for the cost of replacing the:

● bathroom taps

● kitchen tap and new plumbing

● new powerpoints and wiring

● replacement of kitchen cupboards and benchtop

● vanity

● cooktop

● kitchen sink

● oven, and

● rangehood

These items are separately identifiable as principal items of capital equipment and the cost of replacing them is capital in nature.

Decline in value

You can deduct an amount equal to the decline in value for an income year of a depreciating asset to the extent that it is used for a taxable purpose (section 40-25 of the ITAA 1997).

A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997), such as rental income.

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

Division 40 of the ITAA 1997 does not apply to capital works to the extent that an amount is or could have been deductible under Division 43 of the ITAA 1997.

The sink, oven, cooktop and rangehood are depreciating assets as they have a limited effective life and can reasonably be expected to decline in value over the time they are used.

As you use these depreciating assets in your rental property, and no amount is or could be deducted for them under Division 43 of the ITAA 1997, you are entitled to claim deductions for their decline in value.

Capital works

Bathroom vanities, taps, shower screens, new wiring, powerpoints, built in wardrobes and new plumbing are affixed permanently to the building and cannot be easily removed without causing damage. As such, they are considered to form part of the fabric of the building.

On this basis these items are not depreciating assets but are part of the setting of the income earning activity. As such they are not subject to deductions for their decline in value under section 40-25 of the ITAA 1997; however, a deduction may be allowable under Division 43 of the ITAA 1997 (subsection 40-25(2) of the ITAA 1997).

Division 43 of the ITAA 1997 allows deductions for certain capital expenditure incurred on income producing buildings and other capital works, including alterations, extensions and improvements to buildings.

The rate of deduction for capital works begun after 26 February 1992 which are used to produce rental income is 2.5% (section 43-25 of the ITAA 1997).

Bathroom vanities, taps, shower screens, new wiring, powerpoints and new plumbing are capital works for the purposes of Division 43 of the ITAA 1997. The expenditure on these items is capital expenditure for which a deduction is allowable over 40 years at the rate of 2.5% per annum. You are entitled to a capital works deduction for the cost of these items.

TR 93/23 states that expenditure for repairs is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of an entirety.

Paragraph 38 of TR 97/23 states that a property is more likely to be an entirety if:

● the property is separately identifiable as a principal item of capital equipment; or

● the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or

● the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

● the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.

The kitchen cupboards and benchtop are a separately identifiable thing representing an entirety in themselves and the expenditure on replacing the cupboards and benchtop results in a renewal or reconstruction of an entirety. The expenditure is not a repair but is capital in nature. An annual deduction of 2.5% of the cost of this item is allowable under Division 43 of the ITAA 1997.