Edited version of private advice

Authorisation Number: 1052221589828

Date of advice: 14 February 2024

Ruling

Subject: Rental property - repairs

Question 1

Are the works completed on the structural supports for the windows of the investment property considered repairs that are fully deductible in the income year that they incurred under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. You can claim an immediate deduction in the income year you incurred the expense for the repair of the steel structural supports for the windows, reinstating bricks, internal plaster and paint. These expenses are allowable as similar materials were utilised and they restore the efficiency of function on an area of the property that has become dilapidated.

Question 2

Is the upgrade of the glazing specification on the windows considered a repair that is fully deductible in the income year that they incurred under section 25-10 of the ITAA 1997?

Answer

No. The replacement of the glazing specification provides a greater efficiency of function, which is considered an improvement to the property. The costs associated with this improvement must be accurately segregated from the repair costs.

This ruling applies for the following periods:

Year ended XX XXXX 20YY

Year ended XX XXXX 20YY

The scheme commenced on:

XX XXXX 20YY

Relevant facts and circumstances

You own an investment property.

The property was purchased in 20YY and became an investment property as of XX XXXX 20YY.

The condition of the windows upon purchase date was reasonable with some minor cracking.

The property defect was identified by an engineer who inspected the property on XX XXXX 20YY and delivered their report on XX XXXX 20YY.

The report detailed that the structural supports were defective and provided recommendations for works to be completed.

The repairs include the structural supports to the three water-facing corner bay windows, replacement windows, reinstating bricks, internal plaster repairs and paint to repaired areas.

A builder completed building plans for the works necessary and will utilise materials similar to the original property's material. The similar materials include red brick, timber, plaster and paint.

The replacement windows will include an upgraded glass specification to double glazing which provides a thermal insulation benefit.

The replacement steel members will utilise galvanised steel.

No payments were received from an insurance company in relation to the costs of the works completed.

The costs incurred within the 20YY-YY income year are $XX.

The costs incurred within the 20YY-YY income year are $XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Question 1

Are the works completed on the structural supports for the windows of the investment property considered repairs that are fully deductible in the income year that they incurred under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes. You can claim an immediate deduction in the income year you incurred the expense for the repair of the steel structural supports for the windows, reinstating bricks, internal plaster and paint. These expenses are allowable as similar materials were utilised and they restore the efficiency of function on an area of the property that has become dilapidated.

Question 2

Is the upgrade of the glazing specification on the windows considered a repair that is fully deductible in the income year that they incurred under section 25-10 of the ITAA 1997?

Summary

No. The replacement of the glazing specification provides a greater efficiency of function, which is considered an improvement to the property. The costs associated with this improvement must be accurately segregated from the repair costs.

Detailed reasoning

Under section 8-1 of ITAA 1997 you can deduct 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.

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 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.

An 'improvement', on the other hand, provides a greater efficiency of function in the property - usually in some existing function. 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.

If, however, 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.

In your case, the upgrade to the glazing specification is a distinct improvement to the property as it provides improved thermal insulation. You must segregate the costs associated with this improvement compared to the repairs on the rest of the works completed.