Edited version of private advice

Authorisation Number: 1052211106302

Date of advice: 18 January 2024

Ruling

Subject: Rental deductions

Question 1

Are the expenses in Table A considered repairs and allowable deductions under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

General Repairs

Based on what you have outlined, the work done in Table A constitute repairs or maintenance as the work did not change the character of the property and did not improve the efficiency of function of the property. Accordingly, amounts incurred to complete the work items in Table A would be deductible under section 25-10 of the ITAA 1997.

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.

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.

Question 2

Are the expenses in Table B considered capital works under Division 43 of the ITAA 1997?

Answer

Yes.

Capital Expenditure

In your scenario, the work items or parts listed in Table B are to be capital because they are an improvement and are to be considered capital works. Accordingly, amounts incurred to complete the work items in Table B would be deductible under Division 43 of the ITAA 1997.

Paragraph 55 of TR 97/23 explains that repairs done at the same time as improvements are deductible where some parts of the project relating to the improvements can be effectively separated and considered in isolation from the rest of the project. In that situation, it is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation, is a repair. If individual parts of the total project can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible. It must be possible to segregate the cost of the repairs effected from the capital cost of the improvements.

If repair work is inextricably bound up with work of an improvement nature, and the repair work 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.

This ruling applies for the following period

Period ending DD MM 20YY

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

You engaged a pest and building Inspector who identified a water leakage under the house.

You engaged Plumber A to do an inspection.

Main findings from Plumber A investigations were:

•                     Damaged wall tile / waterproofing membrane failure of the main bathroom shower had caused water ingress underneath the house.

Plumber A recommended a shower sealing company attend to regrout, reseal and repair the main bathroom shower wall tiles and perimeter of the bath.

You engaged Plumber B to see what's the best way to fix the issue.

Plumber B initially recommended removing the tiles, waterproofing them and install since it was a waterproofing issue.

Upon visual inspection of the main shower over bath it was found there were cracked drummy tiles around the walls of the bath.

During inspection, it was also found that the seals and grout joints had deteriorated.

Due to the age of the property, asbestos was assumed and a quote to have it removed was provided.

You decided to engage Plumber B to convert bath into a shower.

Invoice Provided shows that main work conducted has been classified as:

Table 1Table A

Table 2 Table B

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43