Edited version of private advice

Authorisation Number: 1051690441247

Date of advice: 2 June 2020

Ruling

Subject: Rental property deductions - repairs vs capital works

Question

Are you entitled to an immediate deduction for the cost to restore your balcony and replace your French doors?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You own a rental property.

You rented out your property.

You were informed that there were significant rotten timbers in the balcony and French doors.

Works were carried out to repair the damage.

The property remained tenanted while the work was carried out.

You paid for the entire cost of the work.

The damaged balcony was demolished and reconstructed.

The French doors were replaced.

The timber was removed and replaced.

Electrical cables were re-routed to allow for a replacement of a support beam.

The materials used to repair the damage were the same as the materials that were replaced.

The work restored the efficiency of function of the balcony and French doors.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Summary

You are not entitled to an immediate deduction for the costs you incurred to restore your balcony and replace your French doors as these expenses are considered to be capital in nature.

Detailed reasoning

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 is distinct from renewal or reconstruction. Renewal, replacement, or reconstruction of, the whole or substantially the whole of a thing or structure (entirety) is likely to be considered a capital improvement rather than a deductible repair.

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.

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.

The rate of deduction for capital works for a residential property is 2.5% of construction expenditure over 40 years.

Subsection 43-70(2) of the ITAA 1997 excludes certain expenditure from 'construction expenditure'. Expenditure on demolishing existing structures is so excluded (paragraph 43-70(2)(b) of the ITAA 1997).

Application to your situation

In your case you reconstructed the balcony and replaced the French doors. The balcony and the French doors are considered to be separately identifiable items of capital with their own function. It is considered the items were reconstructed and replaced in their entirety. The expenditure is therefore capital in nature and is not a deductible repair. The expenditure is regarded as construction expenditure for which a deduction is available under Division 43 of the ITAA 1997. A deduction is not allowable for the demolishing costs.