Edited version of private advice

Authorisation Number: 1052176473013

Date of advice: 16 October 2023

Ruling

Subject: Deduction - repairs

Question

Are you entitled to a deduction for the cost of replacing the tiled section of the roof of the rental property with Colorbond under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

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 under section 25-10 of the ITAA 1997.

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.

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 existing roof is made up of part metal, and part concrete tiled roofing, and after inspections it has been recommended to replace the concrete tiled part of the roof due to the presence of cracks and deterioration.

You intend to replace the damaged concrete tiled part of the roof with Colorbond as it is as a more cost-effective option, and this would not improve the functionality of the roof.

Your property has been rented out continuously since you purchased it, and the intended work to be undertaken will merely be to restore the functioning of the damaged section 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.

As such, and based on your circumstances, the cost of replacing the damaged tiled part of the roof with Colorbond is an allowable deduction under section 25-10 of the ITAA 1997.

This ruling applies for the following period:

Year ending XX/XX/20XX

The scheme commenced on:

XX/XX/20XX

Relevant facts and circumstances

You purchased a property at XXX (the Property) on XX/XX/20XX.

The Property has been rented out continuously since you acquired it.

The roof was not in need of repair at the time the Property was acquired and when you commenced holding it as a rental property.

The existing roof is made up of part metal, and part concrete tiled roofing, and has not been repaired since you acquired the Property.

During the last routine inspection, water damage and moisture was evident on the ceiling inside the Property.

The roof was then inspected and it was recommended to replace the concrete tiled part of the roof due to the presence of cracks and deterioration.

The existing parts of metal roofing will not be replaced and the gutters will remain.

You have received 2 quotes, one to replace the existing concrete tiles with the same, and the other to replace the existing concrete tiles with Colorbond metal roofing.

You will be replacing the roof with Colorbond as it is the more cost-effective option. This will not improve the functionality of the roof.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10