Edited version of private advice

Authorisation Number: 1051625164419

Date of advice: 15 January 2020

Ruling

Subject: Rental deductions

Question 1

Are the amounts incurred for the repairs and later replacement of metal roof area (Area B) deductible under section 25-10 of the Income Tax Assessment Act (ITAA 1997)?

Answer

Yes. The removal of the metal section of the roof and replacement with Zincalume materials will be deductible under section 25-10 of the Income Tax Assessment Act (ITAA 1997). The amounts incurred for minor repairs to the metal section of the roof will also be deductible under section 25-10 of the ITAA 1997.

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used solely for income producing purposes. In this instance, the repair and replacement of the metal section of the roof was undertaken to restore the function of the roof. It did not involve a replacement of the entirety and was undertaken to prevent further damage. In addition, the premises are used solely for the purpose of producing assessable income. Therefore, the repair and replacement of the metal section of the roof will be deductible.

Question 2

Are the amounts incurred by tenants for loss of income due to water damage deductible under section 8-1 of the ITAA 1997?

Answer

Yes. For an expense to be deductible under section 8-1 of the ITAA 1997, the expense must be incidental or relevant to the earning of assessable income or necessarily incurred in carrying on a business. In this instance, the expense is incurred as an incident of earning your assessable income by renting out a commercial rental property.

In addition, the nature of the expense must be considered. Expenditure that is of a capital nature will not be deductible. Expenditure will be capital in nature where it is incurred to bring into existence an asset or advantage that provides an enduring benefit. Where the expenditure merely preserves the right to produce assessable income, the expenditure will be revenue in nature.

Here, the expense arose as a result of you letting out a commercial property to earn assessable income. You have not received an enduring benefit, but merely preserved your right to produce assessable income. Therefore, the cost to the tenants of repairing water damage at the property and the subsequent loss of income for the tenants due to cancellations of functions is sufficiently connected to the production of your assessable income to be deductible.

Question 3

Are the amounts incurred for repairs and charges associated with water damage and replacement of the roof over the rear section of the property (Area A) deductible under section 25-10 of the ITAA 1997?

Answer

Yes. The replacement of the rear section of the roof was undertaken to resolve ongoing water leaks and to restore the function of that part of the roof. Although the section of roof containing asbestos was replaced with a different material, this will still constitute a repair as it was merely restoring the function of the roof and was not a replacement of the entirety. It was necessary to repair the roof with a different material due to environmental and practical reasons. The replacement of the section of the roof is not a replacement of the roof in its entirety but a repair of a section of the roof. Therefore, the amounts will be deductible.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse own a commercial rental property at XXX. The property is managed by XXXX. The property is currently tenanted by XXXX who operates a shop/restaurant. The property was built in the 19XXs using asbestos material in the construction of the roof. The roof over the front section (Area A) was built using asbestos cement sheeting. The roof over the rear section (Area B) was built using corrugated metal sheeting.

In 20XX, you engaged XXXX from XXXX to organise an inspection of the roof and fascias of the building. XXXX emailed you stating that they had been told by XXXX (the plumber who inspected the roof and fascias) that the asbestos section of the roof (Area A) was in extremely poor condition. XXXX recommended that it be removed and a new roof be installed.

In 20XX, XXXX (the tenant) emailed the Property Manager at XXXX to report several water leaks and request an inspection. Photos of these water leaks inside the building were taken by the tenant and received by the agent.

The agent emailed you reporting water leaks which were entering the rear of property. The tenant then emailed the agent reporting the effects of the water leak on their renovations. They also supplied photos of the damage caused by the water leaks.

Minor repairs were carried out to the roof over the rear section of the property (Area A) in 20XX. This did not resolve the issue of water leaks however. Therefore, removal of the asbestos section of the roof was carried out in 20XX. The asbestos fibre cement sheeting was replaced with metal sheeting. The roof was only partially replaced as at this time there was no issue with the roof over the front section of the property (Area B) at that stage.

Following a week of heavy rainfall in 20XX, further leaks and flooding occurred in Area A of the roof. This caused water damage to the tenants' renovation works which they were undertaking at the time. These renovations included tiling, painting and floor work. As you were overseas at the time, an emergency plumber was called to repair the damage in Area B in 20XX.

Following this repair in 20XX, the metal roof area (Area B) was investigated. The section of roofing was replaced in 20XX. The rear section of the roof was replaced in 2018.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10