Edited version of private advice

Authorisation Number: 1051989563603

Date of advice: 2 June 2022

Ruling

Subject: Rentals - deductions (repairs)

Question 1

Are the expenses you incurred on your property for internal works and roof replacement considered a deductible repair under section 25-10 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Period ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The property is a xxxx federation home that was purchased by you in xxxx.

When you bought the house there was no visible signs of damage but within a period of time problems triggered by a leaking roof started to emerge.

You were advised that the roof was xx years old.

It was galvanised iron, rusted, leaking in numerous places and causing water damage internally (visible and invisible).

You provided a copy of the building inspection report.

The building inspection report was completed at the time of purchase and whilst there was mention of some wood root in the eaves of the building, the condition of roof coverings was scored xx out of xx and the roof frame was scored xx out of xx. Internal walls were also scored xx out of xx.

They had it patched a couple of times whilst they occupied it as their principal place of residence. Once in xxxx and again in xxxx.

You moved out in xxxx and rented the house out.

Further work was done in xxxx whilst it was still tenanted and that seemed to work for a time. However, the same problem re-emerged and eventually they had the roof assessed and was advised that it was beyond repair and needed to be replaced. By this time, there was some leaking inside the property.

The roof was replaced with a modern day equivalent - a Colourbond roof.

There was additional work due to the interior water damage - drying out walls, painting, fixing flashing on externals etc.

The tenants moved out in xxxx as they could not occupy it whilst the work was carried out for safety reasons.

Work started around xxxx and was completed around xxxx.

New tenants moved in on xxxx.

The total amount spent on the roof was $xxxx

The total amount spent on internal work was $xxxx

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Summary

The replacement of the roof sheeting with Colourbond sheeting satisfies the meaning of repair in that it involves restoring the efficiency of function of the property without changing its character. As the cost of replacing the roof sheeting of your rental property is not capital in nature, it will be an allowable deduction.

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, or a part of the premises, used solely 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.

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: W Thomas & Co v. FC of T (1965) 115 CLR 58; (1965) 14 ATD 78; (1966) ALR 915.

A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Works can be repairs if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

Subsection 25-10(3) of the ITAA 1997 precludes a deduction for repairs where the expenditure is of a capital nature.

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.

In your case;

•         the replacement of the roof sheeting is a repair to the rental property. The rental property is considered to be the entirety (paragraph 40 of TR 97/23).

•         the use of Colourbond sheeting instead of galvanised sheeting does not result in a greater efficiency of function. It is merely replacement with a modern equivalent.

•         you have owned the rental property for approximately 9 years. The need for repair has arisen during the period of income production.

Paragraphs 48 and 49 of TR 97/23 identifies that the use of different or more modern material to replace the original material does not necessarily prevent the work from being a repair. It is the restoration of an item's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant.

As the cost of replacing the roof of your rental property is not considered capital in nature, it will be an allowable deduction.