Edited version of private advice

Authorisation Number: 1052128637269

Date of advice: 13 June 2023

Ruling

Subject: Deductibility of repairs to rental property

Question 1

Are the costs incurred by the Trustee of the Trust deductible repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA) for the year ended 30 June 20XX?

Answer

Yes

Question 2

For the costs of repairs that are incurred by the Trustee of the Trust and are considered deductible, is the deductible percentage 93.97% under subsection 25-10(2) for the year ended 30 June 20XX?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background

The Trust holds a number of commercial and residential properties.

The Property was acquired in 20XX.

The Property is operated in a commercial manner and generates income from short stay holiday rentals.

Private usage

A related party to the Trust uses the Property, and the Trust keeps records of this private use. The private use of the Property for the year ended 30 June 20XX based on time used is X%.

Details of the property

You have provided a floorplan and photos of the property. It is a timber structure with a Colourbond cladding on the façade.

Details of repairs

During the year ended 30 June 20XX, the Property was subject to extensive repairs due to damage and general deterioration of the property during the years of ownership. The Trust spent $XXX,XXX on these repairs.

You provided invoices, explanations and photos of the work done.

Repairs were required due to deterioration since purchasing the property. All repairs used 'like for like' material. None of the repairs are an addition or alteration to the property but replace existing elements with like for like material. None of the repairs are maintenance.

The Property was unable to be advertised for rent for X% of the year due to the repairs that were required to be undertaken.

You still own the property and have an intention to continue to rent it in the short term.

Relevant legislative provisions

Section 25-10 of the Income Tax Assessment Act 1997

Subsection 25-10(2) of the Income Tax Assessment Act 1997

Subsection 25-10(3) of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

The expenses were incurred to repair damage and fair wear and tear done to the property during the period of ownership. The expenses are deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the period that the property was available for rent. This period will include the period of the repairs.

Detailed reasoning

Pursuant to section 25-10 of the ITAA 1997 you are entitled to claim a deduction for the cost of repairs to property used for income producing purposes. This deduction is to be apportioned if the property was only partly used to produce assessable income in accordance with subsection 25-10(2). However, capital expenditure is not deductible under this section as outline in subsection 25-10(3).

Taxation Ruling TR 97/23 Income Tax: deductions for repairs (TR 97/23) provides our view on the deductibility of repairs under section 25-10 of the ITAA 1997.

Paragraph 3 of TR 97/23 states that the word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

Paragraph 16 of TR 97/23 states that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.

Paragraph 21 of 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.

Paragraph 22 of TR 97/23 states that if work done to property goes beyond what is a 'repair' in terms of section 25-10 of the ITAA 1997, any expenditure for the work is not deductible. The work may go beyond 'repairs' in terms of the section if it:

(a)  changes the character of the property; or

(b)  does more than restore its efficiency of function.

However, paragraph 59 of TR 97/23 states that expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10 of the ITAA 1997.

You have provided invoices and documents to demonstrate the need for repair due to wear and tear from the properties location. This state of damage and deterioration was not in existence at the date you acquired the property.

The Commissioner has considered whether or not the nature and extent of the works done to the property make the repairs and works that have been carried out, amount to more than just a repair and go beyond this to being a substantial improvement of the property.

Given the above, the expenses incurred on the Seal Rocks Property were to repair the damage and fair wear and tear done to the property during the period of ownership.

The repairs have resulted in a minor degree of improvement of the property. However, the works completed do not have the characteristics required to conclude that there has been a substantial improvement, addition or alteration of the property.

Therefore, the repair expenses are deductible.

Conclusion

The repairs to the property are deductible under section 25-10 of the ITAA 1997 and will need to be apportioned for the period of private usage. Please refer to question 2 below.

Question 2

Summary

Any deductible repairs costs need to be apportioned. Your deductible percentage is X%.

Detailed reasoning

Repair expenses are to be apportioned for the percentage the property was used to generate assessable income pursuant to section 25-10 of the ITAA 1997 in the financial year.

You have advised that during the period of time the repairs were occurring the property was not available for rent. This was for X% of the year. You do not need to apportion your deductible amount for the time that the repairs were occurring and the property was unoccupied. This is because the property was rented out immediately before the repairs were needed and the deterioration and damage being repaired occurred during the rental period.

You have also advised that there was personal use of the property for X% of the year. You do need to apportion your deductible amount for the percentage of time when the property was not available to earn rental income. As such the deduction for repairs under section 25-10 of the ITAA 1997 will need to be apportioned such that the appropriate deductible percentage is X%.

On this basis X% of the repair expenses and maintenance expenses for the property are deductible.

Conclusion

Any deductible repairs or deductible maintenance costs need to be apportioned. Your deductible percentage is X%.