Edited version of your written advice

Authorisation Number: 1051176371884

Date of advice: 21 December 2016

Ruling

Subject: Rental Property costs

Question 1

Are you entitled to a repairs deduction under s25-10 ITAA97 for costs incurred on your rental property?

Answer

Yes.

Question 2

Are you entitled to treat the cost of project management fees associated with the repairs on your rental property as an allowable deduction under s8-1 ITAA 97?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June xxxx

The scheme commenced on

1 July xxxx

Relevant facts

You have a rental property located at which has been rented.

You are the sole owner of the property.

During a period you rented the property to three individuals with an agreed rental increase if additional persons moved in. You used a property letting agent to manage the rental and .trusted their advice when you renewed the initial one year lease for an additional year without inspecting the property.

The letting agent advised that some minor complaints had been received and addressed during the initial lease and that is why you renewed the lease with the existing tenants. Over time you experienced a number of complaints from neighbours as to nuisance and noise levels from the tenants. After a number of warnings to the tenants the problems led to you issuing the tenants with a notice to move out.

During the occupation by the above tenants substantial damage was sustained.

Substantial damage was sustained to the bathrooms and surrounding rooms as a result of the excessive and careless usage of water by the tenants during their occupation of the property.

You became aware that water usage at the property was substantially above the average consumption and you became aware that six people were occupying the premises and the rent was increased accordingly.

Due to the extent of work undertaken on the rental property, you engaged a project manager to oversee the work carried out.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 8-1

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 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.

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, addition or alteration 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.

Bathroom and carpets

The damage to the bathrooms and surrounding rooms resulted from the excess water usage from the shower pooling on the tiles and grout leaking onto the waterproof membrane causing it to fail and as result water leaked onto the floor underneath and into surrounding rooms.

To repair the damage it was necessary to remove the tiles, replace the waterproofing membrane, replace the tiles and remove and replace the carpets in the surrounding rooms which had been water damaged.

The tiles and carpet used to replace the original items were of like materials and equivalents of the original. The waterproofing membrane is painted on and is a standardised product.

The painting is considered to be deductible repairs.

Deck

The deck was rendered unusable due to wear and tear with nails protruding from the deck and parts of the timber planks broken away due to high usage of furniture being moved around. The timber planks were replaced with planks of the same dimensions and the original balustrades were retained as were other deck fittings.

Other repairs

The other repairs you have made including the painting is considered to be replacement and renewal of worn out or broken parts. It is considered the maintenance undertaken is keeping the property in a tenantable condition.

The above work is not regarded as capital in nature and is regarded as normal repair and maintenance expenditure. Therefore a deduction is allowable under section 25-10 of the ITAA 1997.

Project manager costs

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income

The project management costs for the portion relating to the repair work of the rental property is deductible as they were necessarily incurred in gaining or producing your assessable income.