Edited version of private advice

Authorisation Number: 1052137101285

Date of advice: 4 July 2023

Ruling

Subject: Deduction - rental property

Question

Are you entitled to claim a deduction to replace roof, gutters downpipes, eaves and facia to the main house and pergola posts, beams and roof?

Answer

Yes. Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for 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.

The following are examples of expenses which are capital or of a capital nature:

•         replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)

•         improvements, renovations, extensions, and alterations, and

•         initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

Taxation Ruling TR 97/23 Income tax: deductions for repairs 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 either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

Expenditure for repairs to property is capital expenditure if the expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety.

Relevantly, paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered a subsidiary part rather than the entirety.

Paragraph 50 of the TR 97/23 explains if the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair.

In your case the work was done merely to restore the functioning of the roof, which is a subsidiary part of the building rather than an asset in its entirety. As the roof was in a good state at the time you purchased the property the work done is not an initial repair.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You, the self-managed superannuation fund (SMSF), are the sole owner of the rental property.

There was no building inspection at the time of purchase, and you were not aware of any issues with the roof prior to or at the time of purchase.

Gaps and holes had to be fixed due to the rain, rodents and noise entering the property.

The roofer explained the roof is over 60 years old and couldn't be repaired. It needed to be replaced along with the gutters, downpipes, eaves and fascia to prevent further damage to the rest of the house.

The roofer also explained the pergola was in a similar state and needed replacement as it was deemed unsafe.

Scaffolding was required to safely carry out the work.

The property was rented at the time the reroofing was done.

The property is rented to non-associated parties.

The SMSF incurred the expense and paid for the work.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10