Edited version of private advice

Authorisation Number: 1051791974058

Date of advice: 19 February 2021

Ruling

Subject: Deduction - repairs

Question 1

Are you entitled to a repair's deduction for the painting, the purchase of and the laying of the new carpets?

Answer

Yes.

Question 2

Are you entitled to a repair's deduction for the purchase of and the laying of new tiles on your rental property?

Answer

No.

This ruling applies for the following period(s)

Year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You both jointly own a rental property.

The property was rented for XX years, starting on XX December 20XX and was continuously rented out until XX October 20XX.

After the tenancy ended you determined that the carpets and tiles needed replacing and the house needed painting because of tenant damage over the years.

The painting and the purchase of and laying of the carpet and tiles occurred on XX October 20XX.

The carpets were purchased and laid.

The painting was undertaken and completed.

The tiles were purchased and laid.

After the work was completed you moved into the property on XX December 20XX.

The property is not available for rent.

Relevant legislative provisions

Income Tax Assessment Act 1997, subsection 25-10(1)

Income Tax Assessment Act 1997, subsection 25-10(2)

Income Tax Assessment Act 1997, subsection 25-10(3)

Reasons for decision

Question

Summary

Are you entitled to a repair's deduction for the cost of the painting, carpet and tiles for your rental property?

Detailed reasoning

Subsection 25-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises solely used for income producing purposes. Subsection 25-10(2) of the ITAA 1997 allows a deduction for the cost of repairs to premises partly used for income producing purposes but can deduct only so much of the expenditure as is reasonable in the circumstances. However, subsection 25-10(3) of the ITAA 1997 denies a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 (TR 97/23) deals with the issue of deductions for repairs. Generally, a 'repair' involves a restoration of a thing to a condition it formally had without changing its character. Works can be fairly described as 'repairs' if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time (paragraphs 13-16 of TR 97/23).

TR 97/23 indicates that expenditure for repairs to property is capital in nature and not deductible under section 25-10 of the ITAA 1997 where:

•         the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair'

•         the extent of the work carried out represents a renewal or reconstruction of the entirety, or

•         the work is an initial repair.

TR 97/23 explains that an improvement is considered to be the provision of something new, which generally furthers the income-producing ability or effective life of the asset and generally of the thing improved. It lists a summary of indicative factors as follows:

•         there is an increase in the value of an asset

•         future repairs are now less likely as a result of the expenditure

•         the asset's expected life is extended.

In Case W77 89 ATC 698; AAT Case 5264 (1989) 20 ATR 3888 the owner of a rental property was denied a deduction for a remodelling of a bathroom, amongst other expenditure, where repair was needed because of age, deterioration and general wear and tear. It was held that the work done in remodelling the bathroom was extensive and could be described as a complete renovation designed to improve the unit rather than simply to restore it.

Paragraph 79 of TR 97/23 states the situation when a property is used for income producing purposes for only part of the income year. If property is held in a year of income partly for income purposes and partly for non-income purposes, repair expenditure is only deductible to the extent that is reasonable in the circumstances of the case. The reasonableness test is an objective one and each case must be decided on its own merits. However, we would expect that the amount of expenditure allowable as a deduction under subsection 25-10(2) would ordinarily be calculated by reference to the extent to which the property was held in the year of income for income purposes.

Taxation Ruling IT 180 states that, providing the necessity for the repairs can be related to the period of time during which the premises were producing assessable income and providing, further, that the premises have produced assessable income during the year in which the expenditure was incurred, the cost of any repairs will be deductible.

Application to your circumstances

Painting Costs

In your case, you have painted the property. As the work done makes good on the deterioration of the property, and that you only rented the property for XXX days in the 20XX financial year you are entitled to a partial deduction for the painting.

Carpet Costs

In your case, you incurred costs in replacing the carpet in your investment unit when it was damaged. The area of carpet you replaced was similar in area to the damaged carpet. The replacement carpet was of a similar quality to the damaged carpet. Replacing the carpet has not resulted in a greater efficiency or function to your property. It has merely made good the damage. Therefore, replacing the carpets is not capital in nature. As you only rented the property for XXX days in the 20XX financial year you are entitled to a partial deduction for the carpeting.

Tiles

In your case the tiling represents a remodeling of the property. The work you undertook was extensive covering the kitchen, meals area, family room, two hallways, the laundry, the vanity /toilet area and formal dining area.

The re-tiling could not be considered to be merely remedying defects. Remedying defects would be limited to repairing or replacing only the damaged tiles. The amount of expenditure in this case involves the renewal or modernization of the property.

Hence, it can be argued that the work done to the property will extend its income producing ability and significantly enhance its salability. The value of the property will be likely to have increased as a result of the work done, and future repair expenses are likely to be reduced.

Therefore, the tiling done is considered to be a capital improvement and is not deductible as a repair under subsection 25-10(3) of the ITAA 1997.