Edited version of private advice

Authorisation Number: 1052165464591

Date of advice: 7 September 2023

Ruling

Subject: Deductions - repairs

Is the cost of replacing the weatherboards, at your rental property, deductible as a repair under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the cost of replacing the window frames, at your rental property, deductible as a repair under section 25-10 of the ITAA 1997?

Yes.

To the extent that you are able to separately segregate the repairs (replacement of the window frames) from the improvements (installation of double-glazed windowpanes). Where the repairs costs cannot be separately segregated and its cost accurately quantified independently from the cost of the improvements, we regard the cost of the entire work as being of a capital nature and not deductible

Question 3

Is the cost of installing double-glazed windowpanes, at your rental property, deductible as a repair under section 25-10 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You own a residential investment property (The Property).

You purchased the Property on or around DD MM 20XX.

You did not obtain a building inspection report prior to purchasing the Property.

The Property was built in 19XX.

The Property has been available for holiday rentals since 20XX with some private use during your ownership period.

In the year ended 30 June 20XX, the Property was genuinely available for rent for 52 weeks of the year.

You do not have a property manager.

Works were undertaken to fix the weatherboards during the year ended 30 June 20XX and were completed on DD MM 20XX.

You have provided an invoice for the replacement of the windows for the amount of $X.

Works undertaken to fix the windows were undertaken in the year ended 30 June 20XX and were completed on DD MM 20XX.

Cedar weatherboards were replaced with fibre cement boards.

Wooden window frames were replaced with aluminium frames.

You were unable to provide photos of the damaged weatherboards.

You provided photos of the damaged windows and window frames.

There have been no other repairs or improvements undertaken at the property since the property was purchased in 20XX.

Many of the weatherboards were cracked or warped, and rotten in places due to the close proximity of the house to the ocean.

You advised it was it was cheaper to replace all the boards rather than trying to do multiple repairs of weatherboards in place around the house.

Most of the windows and doors were weathered and warped due to the close proximity of the house to the ocean and were rotten along the glass seals and in the joins especially along the window seal.

The glass in some windows had become brittle and seemed to shatter more easily posing a safety hazard for tenants.

Some window frames had also been damaged by cockatoos.

Table of payments:

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 43-70

Reasons for decision

Detailed reasoning

Under section 8-1 of 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. You have rental income and can claim certain rental expenses as a deduction.

Subsection 25-10(1) of the 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 that are considered capital expenditure. Division 43 of the ITAA 1997 allows deductions for capital works expenditure.

The following are examples of expenses which are capital expenditure 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 (TR97/23)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 either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

Entirety

Renewal, replacement, or reconstruction of, the whole or substantially the whole of a thing or structure (entirety) is likely to be considered a capital improvement rather than a deductible repair.

The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' (Lindsay v FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201 (the Lindsay case)).

In the Lindsay case, the taxpayer company was a slip proprietor and ship repairer. It claimed a deduction for the cost of reconstructing one of two slipways. In finding that the work was not repairs, Kitto J rejected the taxpayer's submission that either the whole slip (comprising the slipway, hauling machines, cradles, and winches by which vessels were manoeuvred on to it) or the whole of the business premises containing the slipway should be regarded as the relevant entirety. His Honour decided that the slipway was an entirety by itself and not a subsidiary part of a larger whole.

In the case of WG Thomas & Co Pty Ltd v FC of T (1965) 115 CLR 58; (1965) 14 ATD 78, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor, or the roof was a repair to the building.

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 to be a subsidiary part rather than the entirety.

Property is more likely to be an entirety, as distinct from a subsidiary part, if:

•         the property is separately identifiable as a principal item of capital equipment; or

•         the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or

•         the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

•         the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.

Repair is distinct from improvement

Paragraphs 44 to 47 of TR 97/23 discuss improvements. An improvement provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.

Paragraph 46 states: If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to consider, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property.

Paragraphs 48 to 52 of TR 97/23 discuss the use of different materials. In particular, paragraphs 49 and 50 provide:

49. Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant.

50. 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. However, the greater the work enhances the efficient functioning of the property, the more likely it is that the work constitutes an improvement.

Repairs and improvements effected concurrently

Paragraphs 55 to 57 of TR 97/23 discuss repairs and improvements effected concurrently. If repair work is inextricably bound up with work of an improvement nature, and the repair cannot be separately segregated, and its cost accurately quantified independently from the cost of improvements, we regard the cost of the entire work as being of a capital nature and not deductible.

For example, if work normally regarded as a repair such as painting is done to property as part of or in conjunction with a reconstruction and modernisation of the property and it cannot be segregated and its cost separately quantified it may not be deductible. It is a question of fact and degree.

Maintenance Work - whether "repair"

If you are preventing or fixing deterioration of an item that occurred while renting out your property, this is likely to be maintenance. For example, getting faded interior walls repainted of having a deck re-oiled. This should be claimed at Repair and Maintenance on the rental schedule.

Paragraphs 19 and 20 of TR 97/23 discuss work done to remedy or make good defects, damage or deterioration does not cease to be a repair if it is also done partly-even largely to prevent defects in their very early stages. Repairs are not confined to rectifying defects, damage or deterioration that have already become serious. Work done to property not in need of repair, however, is not repair work and any expenditure for the work in these circumstances is not deductible under section 25-10 of the ITAA 1997.

Some kinds of maintenance work are 'repairs' in terms of section 25-10, for example, painting plant or business premises to rectify existing deterioration and to prevent further deterioration. Other kinds of maintenance work, such as oiling, brushing or cleaning something that is otherwise in good working condition and only requires attention to prevent the possibility of its going wrong in the future, are not 'repairs' in terms of the section. Expenditure on the latter kind of maintenance work may be an allowable deduction under section 8-1.

Paragraphs 92 to 95 of TR 97/23 further consider when maintenance, or work done in anticipation of forthcoming defects or deterioration can be considered a repair if it is done in combination with work of rectification see the BP Oil Refinery (Bulwer Island) Ltd case at 92 ATC 4039; 23 ATR 73. As initially discussed at paragraph 20 of TR 97/23, Oiling, brushing or cleaning something that is otherwise in good working condition and only requires attention to prevent the possibility of its going wrong in the future, is not 'repairs' in terms of section 25-10: compare London & North Eastern Ry. Co. v. Berriman [1946] 1 All ER 255 at 267 and the BP Oil Refinery (Bulwer Island) Ltd case. (The cost of these operations may be deductible under section 8-1.)

Capital works

In some situations, depending on what the expenditure was for, initial repair expenses may be classified as capital works. Capital works is used to describe certain kinds of construction expenditure on buildings, structural improvements, extensions and alterations.

Division 43 of the ITAA 1997 provides a deduction for capital works. Under Division 43 of the ITAA 1997, a deduction for capital works is dependent, among other things, on whether there is 'construction expenditure' for the capital works, which is defined in subsection 43-70(1) of the ITAA 1997 as 'capital expenditure incurred in respect of the construction of capital works'.

Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements addresses a number of matters that are relevant in determining entitlement to, and the amount of, a deduction under Division 43 of the ITAA 1997 in respect of expenditure on the construction of assessable income producing buildings and other capital works. It also identifies certain expenses that are included in construction expenditure.

Paragraph 7 of TR 97/25 outlines the three categories of capital works in respect of section 43-20 of the ITAA 1997 as:

•         Buildings or extensions, alterations or improvements to buildings

•         Structural improvements or extensions, alterations orimprovements to structural improvements; and

•         Environment protection earthworks.

The Rental properties 2023 guide provides on page 26 the following examples of construction expenditure:

•         a building or an extension, for example, adding a room, garage, patio or pergola

•         alterations, such as removing or adding an internal wall, or

•         structuralimprovements to the property, for example, adding a gazebo, carport, sealed driveway, retaining wall or fence.

Subsection 43-70(2) of the ITAA 1997 lists a number of expenditures that are excluded from the definition of construction expenditure.

2) Construction expenditure does not include:

(a) expenditure on acquiring land; or

(b) expenditure on demolishing existing structures; or

(c) expenditure on clearing, levelling, filling, draining or otherwise preparing the construction site prior to carrying out excavation works; or

(d) expenditure on landscaping; or

(e) expenditure on plant; or

(f) expenditure on property for which a deduction is allowable, or would be allowable if the property were for use for the purpose of producing assessable income

If the conditions are satisfied, capital works deductions may be claimed. In the case of residential rental properties, the deductions would generally be spread over a period of 25 or 40 years.

Application to your circumstances

Weatherboards and window frames

The replacement of all the weatherboards are considered to be repairs under section 25-10 of the ITAA 1997 and immediately deductible in the income year you incurred these costs.

The cost of replacing the window frames are considered to be repairs under section 25-10 of the ITAA 1997 and immediately deductible in the income year you incurred these costs, to the extent that you are able to separately segregate these repairs (the replacement of the window frames) from the improvements (installation of double-glazed windowpanes). Where the repairs costs cannot be separately segregated and its cost accurately quantified independently from the cost of the improvements, we regard the cost of the entire work as being of a capital nature and not deductible.

In respect of the term 'entirety', where something is part of a building, the building is the entirety. All external weatherboards and all window frames have been replaced; however, these replacements do not constitute a reconstruction of the entirety as only parts of the building were replaced not the entire dwelling. Therefore, the works undertaken does not amount to a reconstruction of the entirety.

With respect to the weatherboards, we consider no improvements have been made to the external walls due to the replacement of all the weatherboards. The use of Linea (fibre cement) boards does not result in a greater function. It is merely a replacement with a different material. Further, we accept that the replacement of the weatherboards is not an initial repair. You have owned the property since 20XX. The need for repairs arose during the period of income production.

Additionally, we accept that the replacement of all weatherboards is considered a repair because the work has been undertaken to avoid any future deterioration and also to remedy the existing problems. We accept that in this case maintenance was undertaken at the same time as repair, that is, some boards were replaced that were not in need of repair but replaced to prevent further deterioration of the external weatherboards.

The replacement of the window frames are not considered to be a renewal or reconstruction of an entirety, they are not initial repairs or an improvement and the expense is in respect to an income producing asset.

To date, the invoice obtained from the window frames and window supplier, does not segregate, quantify and characterise the replacement of the window frames from the replacement of the glass. You will need to obtain an accurate breakdown of costs from the window frames and window supplier should you wish to be able to claim the replacement of the window frames as a deduction in the income producing year.

Windows

Replacement of single windowpanes with double-glazed windowpanes.

Based on the information provided we are not satisfied that the replacement of the single windowpanes with double glazing is a repair. Double-glazing is not a standard modern equivalent to single glazed windows in Australia. Further, we consider the replacement of single pane windows with double-glazed windows to result in a greater function and to significantly enhance the saleability or market value of the property. Therefore, we consider the installation of double-glazed windows are considered to be an improvement and an immediate deduction is not allowable under subsection 25-10(3) of the ITAA 1997, however, you are able to claim a capital works deduction under Division 43 of the ITAA 1997.