Edited version of private advice

Authorisation Number: 1051963253686

Date of advice: 8 April 2022

Ruling

Subject: Rental expenses - repairs or improvements

Question 1

Are the expenses in Table 1 considered repairs and allowable deductions under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the expenses in Table 2 considered 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:

30 June 20XX

Relevant facts and circumstances

In 20XX, you acquired the property which you treated the unit as an investment property.

This property has been continually rented from the time it was acquired. In 20XX, the strata owners engaged consultants to investigate the cause of water ingress into the building which was causing damage to the property. The investigations found that various waterproof membranes had deteriorated causing widespread leaks.

Although your unit did not sustain damage, other units and common areas were damaged which included damaged carpet, mould growth, and water leaks into the electrical switch board room and basement. The work involved to rectify this damage included internal and external work items that are identified and grouped in Tables 1 and 2.

Some items were removed to facilitate completion of the works and were retained.

Where items were assessed and found to be non-compliant, not fit for purpose or damaged, new items of similar style were installed after the membranes were repaired.

A special levy was introduced to pay for the cost of the works completed. Your share of the levy for the 20XX income year was $XX,XXX.

Relevant legislative provisions

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 deduct 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.

In your case, we determined that expenses you incurred relating to the works at the property were both revenue and capital in nature (improvements). However, paragraph 55 of TR 97/23 explains that repairs done at the same time as improvements are deductible where some parts of the project relating to the improvements can be effectively separated and considered in isolation from the rest of the project. In that situation, 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.

Expenses of a capital nature

We consider the work items or parts listed in Table 2 to be capital 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.