Edited version of private advice

Authorisation Number: 1051959992034

Date of advice: 11 April 2022

Ruling

Subject: Rental expenses - repairs or improvements

Question 1

Are the expenses relating to the works in Table 1 deductible as repairs under 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or as maintenance under 8-1 of the ITAA 1997?

Answer

Yes.

Question 2

Are the expenses relating to the works in Table 2 deductible as capital works under Division 43 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XXX

Relevant facts and circumstances

You undertook work to remediate damaged parts of the property and to rectify building faults to satisfy building standards. The work involved to rectify this damage included internal and external work items that are identified and grouped in Tables 1 and 2.

The total additional levies relating to the ownership of your unit within the building complex is $XX,XXX. From this amount you have identified some work as improvements.

The property was vacant for part of the time whilst rectification work was carried out.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Detailed reasoning

General deductions

Under section 8-1 of the Tax Assessment Act 1997 (ITAA 1997) you can claim a deduction for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are of a capital, private or domestic nature.

Deductions for repairs

Under section 25-10 of the ITAA 1997 you can deduct the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction. The term 'repair' means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable to damage that occurs during your income producing use of the property.

There are situations where repairs are done in conjunction with capital improvements as part of a project. In that case, it is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation, is a repair. If individual parts of the total project can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible. It must be possible to segregate the cost of the repairs actually effected from the capital cost of the improvements.

Expenses of a revenue nature

Based on the facts, the work done to remediate damage caused by water ingress, building movement, wear and tear, and environmental conditions, as identified in Table 1 constitute repairs or maintenance, as the work did not change the character of the property and did not improve the efficiency of function of the property. Accordingly, amounts incurred to complete the work items in Table 1 would be deductible under section 25-10 of the ITAA 1997. The cleaning of gutters, roofing and mould would be maintenance and deductible under section 8-1 of the ITAA 19997.

Expenses of a capital nature

We consider the work items or parts listed in Table 2 to be of a capital nature because they are an improvement or they are considered capital works. Accordingly, amounts incurred to complete the work items in Table 2 would be deductible under Division 43 of the ITAA 1997.