Edited version of private advice

Authorisation Number: 1052266222993

Date of advice: 26 June 2024

Ruling

Subject: Deductibility of rental property expenses

Question 1

Can the taxpayer claim expenses incurred to replace the roofing as deductions under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can the taxpayer claim expenses incurred to rectify the water damage to the ceilings, walls, flooring and joists under section 25-10 of the ITAA 1997?

Answer

Yes.

Question 3

Can the taxpayer claim expenses incurred to replace or repair external and internal locks and replace unserviceable laundry taps under section 25-10 of the ITAA 1997?

Answer

Yes.

Question 4

Can the taxpayer claim expenses incurred for interior and exterior painting under section 25-10 of the ITAA 1997?

Answer

Yes.

Question 5

Can the taxpayer claim expenses incurred to remove kitchen cabinets, purchase replacements and install them under section 25-10 of the ITAA 1997?

Answer

No.

Question 6

Can the taxpayer claim expenses incurred to replace fractured cast iron fittings and replumb external pipes to the kitchen sink under section 25-10 of the ITAA 1997?

Answer

Yes.

Question 7

Can the taxpayer claim expenses incurred to replace the carpet under section 25-10 of the ITAA 1997?

Answer

No.

Question 8

Can the taxpayer claim expenses incurred to receive a valuation for insurance purposes under section 25-10 of the ITAA 1997?

Answer

No.

Question 9

Can the taxpayer claim expenses incurred to sweep the chimney under section 25-10 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

1.    The property is over XXX years old and is largely of timber construction.

2.    It has been in the taxpayer's family for many years and was transferred to the t/p on the death of their parent in 20XX. The property has been continuously rented out since then.

3.    The kitchen dates from the early 19XXs with plywood cabinetry and tiled benchtop.

4.    The exterior was last painted in the 19XXs and the original corrugated iron roof replaced with decramastic metal tiles at a similar time. It is the taxpayer's belief that no internal painting has been done since that time.

5.    The Front stairs and landing were replaced in the early 20XXs.

6.    The bathroom was renovated in 20XX.

7.    The carpet was replaced at the end of a tenancy in 20XX.

8.    A rental appraisal (provided) was received in 20XX indicating that essential and desirable work was required to bring the property up to rentable condition. It was advised that the property at that time would not meet the minimum housing standards coming into effect on 1 September 20XX. Additional works were suggested that would increase its value in the rental market.

9.    This property was available for rent through a property manager. However, on inspection at the end of the tenancy in 20XX, it was apparent that water damage from the leaking roof had affected all ceilings and vertical joint (VJ) interior walls at the front of the house. The ceiling of the sunroom/sleepout had partially collapsed. There was evidence of water flowing down the wall adjacent to the fuse-box. The rear covered deck was unsafe with significant rotten timber flooring and joists. Guttering and downpipes had rusted to the extent that they were hanging below the eaves.

10.  The taxpayer's priority was to make the roof watertight, repair the guttering and obtain quotes for building repairs and painting.

11.  The roofing contractor advised that replacing the demacrastic tiles with colourbond, as the former was unrepairable and no longer manufactured. The taxpayer accepted the contractor's quote and a deposit was paid in February 20XX.

12.  Payment in full was made in May 20XX to a builder for works to replace rotten timbers, including external weatherboards, decking, downstairs battens and supports, sunroom ceiling and VJ boards, plus those in adjacent bedrooms due to water ingress. Comparable materials were used for all work. Rear decking was Merbau, replacing local hardwood, as were the materials for the joists and battens. Exterior weatherboard was replaced with similar wood and interior VJ was replaced where unsalvageable with a modern equivalent.

13.  Photographic evidence was provided of the deterioration of paint work inside and outside the house. A deposit was paid to a painter in June 20XX for painting the interior and exterior.

14.  Secondary issues were replacing or repairing external and internal locks, removing trees and vegetation from the external walls to allow for scaffolding needed by tradespeople, internal plumbing and water compliance certification, property valuation for insurance purposes, real estate inspection, cleaning of chimney and obtaining quotes for kitchen repairs.

15.  Locks were made satisfactory for tenancy at a cost of $X paid in May 20XX.

16.  A plumber replaced unserviceable laundry taps and provided water compliance certification for $X, paid in May 20XX.

17.  The chimney was swept in May 20XX for $X, paid in May 20XX.

18.  A valuation inspection for insurance purposes was undertaken, and valuation report provided for $X, paid in April 20XX.

19.  A kitchen repair was declared impractical by several firms due to the state of deterioration of the 19XXs plywood. All suggested the cost of the replacement to be well over $X. The cheapest option was to install prefabricated cabinetry in the same layout occupying the same floor area, with one less wall cabinet. Cost of materials $X (less $X for integrated dishwasher). Cost of removal of existing cabinets and assembly/installation of replacement was $X, paid in June 20XX. Additional plumbing work was also undertaken at a cost of $X, as the original cast iron pipes were unusable. This was paid for in June 20XX.

20.  Expenses were incurred in June 20XX to clean and seal the rear decking and undertake interior touch up.

21.  Carpet was replaced at a cost of $X in June 20XX.

22.  Bank statements and supplier documentation have been provided.

Relevant legislative provisions

Section 25-10 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 25-5 of the Income Tax Assessment Act 1997

Division 40 of the Income tax Assessment Act 1997

Division 43 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Deductibility of rental property expenses

General principles

1.    Subsection 25-10(1) of the ITAA 1997 states that you can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income. You cannot deduct capital expenditure under section 25-10.

2.    Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23), explains the principles and the circumstances in which deductions for repairs are allowable. The following discussion is based on the principles in TR 97/23, unless otherwise stated.

3.    The word 'repairs' in the context of section 25-10, has its ordinary meaning. It ordinarily 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. Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property.

4.    '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. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

5.    Paragraph 21 of TR 97/23 states that:

What is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property.

6.    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 the income producing use of the property or to defects that emerge during that time.

7.    Generally, repairs restore the item to its former function and efficiency. It is acknowledged that to repair a property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair.

8.    An improvement on the other hand, provides a greater efficiency of function and involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Works that are a substantial improvement, addition or alteration will not be a repair and will not be deductible under section 25-10 of the ITAA 1997 and will be considered to be capital, or capital in nature.

Entirety

9.      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.

10.   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 (Lindsay)).

11.   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.

12.   In the case of WG Thomas & Co Pty Ltd v FC of T (1965) 115 CLR 58; (1965) 14 ATD 78 (WG Thomas), 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.

13.   TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof, floor or wall as just that and no more.

14.   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 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.

Use of different materials

15.   TR 97/23 explains that if expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue. 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. 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. The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility under section 25-10. If the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement.

Technological advances or enhancements

16.   As a general proposition, the greater the degree of technological advancement involved in work done to property, the more it is likely the work goes beyond a 'repair'. This is so because it is more likely the work does more than restore the property to its original efficiency of function.

Work done to meet requirements of regulatory bodies

17.   To constitute a 'repair' for the purposes of section 25-10, work done to meet requirements of regulatory bodies must satisfy the general principles and the various factors discussed in this Ruling. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible under the section. However, work done solely to meet requirements of regulatory bodies is not a 'repair' for the purposes of the section.

Application to your circumstances

18.  The property was acquired in 2012 and has been held solely for income producing purposes. It was available for rent at the time the expenses were incurred.

19.  Where we have considered the general principles and concluded that works constitute a 'repair', this conclusion is not impacted by the fact that it also happens to meet the requirement of the minimum housing standards that came into effect on 1 September 2023.

Question 1

Summary

The works undertaken by the taxpayer to replace the roofing are considered repairs and these expenses are deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

20.  On inspection at the end of the tenancy in April 20XX, it was apparent that the roof had leaked and caused water damage. The original corrugated iron roof was replaced with decramastic metal tiles in the 19XXs. The taxpayer's priority was to make the roof watertight, repair the guttering and obtain quotes for building repairs and painting. The roofing contractor advised replacing the demacrastic tiles with colourbond, as the former was unrepairable and no longer manufactured. The taxpayer accepted the contractor's quote and paid a deposit.

21.   The works that have been carried out have been done to remedy the roof that was no longer water-proof. That is, these works have been undertaken to make good damage that has occurred by natural causes during the passage of time. The roof has been restored to its former function and efficiency. This accords with the definition of 'repair' in TR 97/23.

22. It is noted that 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. Whilst 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), TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof as just that and no more (see WG Thomas). Therefore, the roof is not considered an 'entirety' and is therefore not a capital improvement for the purposes of section 25-10.

23. TR 97/23 explains that if expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue. 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.

24. The roofing contractor advised replacing the demacrastic tiles with colourbond, as the former was unrepairable and no longer manufactured. 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. It is considered that the work done restores the efficiency of the previous function, it does not matter that a different material is used.

25. Consequently, the works undertaken to replace the roof were repairs to rectify the damage at a time when the property had an income producing use. Therefore, a deduction can be claimed in relation to the costs incurred for the works under section 25-10 of the ITAA 1997.

Question 2

Summary

The works undertaken by the taxpayer to rectify the water damage to the ceilings, walls, flooring and joists are considered repairs and these expenses are deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

26.  On inspection at the end of the tenancy in April 20XX, it was apparent that the leaking roof had caused water damage to the ceilings, walls, flooring and joists. Payment was made to a builder for works to replace rotten timbers, including external weatherboards, decking, downstairs battens and supports, sunroom ceiling and VJ boards, plus those in adjacent bedrooms due to water ingress. Comparable materials were used for all work.

27.   TR 97/23 explains that if expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue. 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. 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.

28.   The works have been carried out to remedy the damage from the leaking roof. That is, these works have been undertaken to make good damage that has occurred by natural causes during the passage of time. The ceilings, walls, flooring and joists have been restored to their former function and efficiency using materials comparable to those damaged. This accords with the definition of 'repair' in TR 97/23.

29.   Consequently, the works undertaken to the ceilings, walls, flooring and joists are (and incidental costs incurred to clean and seal the rear decking and undertake interior touch up) to rectify the damage at a time when the property had an income producing use. Therefore, a deduction can be claimed in relation to the costs incurred for the works under section 25-10 of the ITAA 1997.

Question 3

Summary

The works undertaken by the taxpayer to replace or repair external and internal locks and replace unserviceable laundry taps are considered repairs and these expenses are deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

30.  Expenses were incurred to make locks satisfactory for tenancy and to pay a plumber who replaced unserviceable laundry taps and provided water compliance certification.

31.  TR 97/23 states that replacing items which are permanent fixtures installed in premises used for income producing purposes is deductible as a repair under section 25-10 provided it is the replacement of a worn-out unit by a new unit of a similar design that simply restores the efficiency of function. Example 34 specifies replacement of locks as being a 'repair' in these circumstances. Further, it is considered that unserviceable laundry taps are such permanent fixtures.

32.   Consequently, the expenses incurred to replace or repair external and internal locks and unserviceable laundry taps are repairs at a time when the property had an income producing use. Therefore, a deduction can be claimed in relation to the costs incurred for the works under section 25-10 of the ITAA 1997.

Question 4

Summary

The interior and exterior painting are considered repairs and the expenses are deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

33.  Photographic evidence was provided of the deterioration of paint work inside and outside the house. A deposit was paid to a painter for painting the interior and exterior of the property.

34.   In relation to painting TR 97/23 says at paragraph 57:

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 costs separately quantified, it may not be deductible. It is again a question of fact and degree.

35.   That is, we see that painting is normally regarded as a repair, unless it is done as part of a reconstruction or modernisation of the property. Determining such a matter is a question of fact and degree and it is not considered in the current case that the works undertaken are a reconstruction or modernisation. Therefore, the interior and exterior painting are repairs at a time when the property had an income producing use and a deduction can be claimed in relation to the costs incurred for the painting under section 25-10 of the ITAA 1997.

Question 5

Summary

The works undertaken by the taxpayer in the kitchen are not repairs and the expenses to remove kitchen cabinets, purchase replacements and install them are not deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

36.  A kitchen repair was declared impractical by several firms due to the state of deterioration of the 1960s plywood. All suggested the cost of the replacement to be well over $X. The cheapest option was to install prefabricated cabinetry in the same layout occupying the same floor area, with one less wall cabinet. Works were undertaken and expenses incurred to remove the existing cabinets and assemble/install the replacements.

37.  ATOID 2003/222 Income Tax Repairs: replacement of kitchen cupboards in a rental property has the same fact pattern as we are currently dealing with in relation to the removal and replacement of the kitchen cabinetry. It notes that:

...it is accepted that the replacement of the cupboards did not result in a significant improvement in the efficiency or function of the kitchen.

But goes on to conclude based on the authority in Lindsay:

However, if the cupboards are a separately identifiable thing representing an entirety in themselves and the expenditure on replacing the kitchen cupboards results in an improvement or a renewal or reconstruction of an entirety, the expenditure is not a repair but is capital in nature (Taxation Ruling 97/23).

38.  These principles equally apply here. The kitchen cupboards are separately identifiable capital items with their own function and are, therefore, an entirety in themselves. Their replacement is a renewal of an entirety, and the expenditure is not deductible as a repair under section 25-10 of the ITAA 1997. The expenditure is capital in nature.

39.  Division 43 of the ITAA 1997 provides a deduction for capital works used for income producing purposes. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5% per year.

Question 6

Summary

The works undertaken by the taxpayer to replace fractured cast iron fittings and replumb external pipes to the kitchen sink are considered repairs and these expenses are deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

40.  Expenses were incurred for additional plumbing work as the original cast iron fittings and pipes to the kitchen sink were unusable.

41.  TR 97/23 states that replacing items which are permanent fixtures installed in premises used for income producing purposes is deductible as a repair under section 25-10 provided it is the replacement of a worn out unit by a new unit of a similar design that simply restores the efficiency of function. It is considered that unusable cast iron fittings and pipes are such permanent fixtures.

42.   Consequently, the expenses incurred to replace fractured cast iron fittings and replumb external pipes to the kitchen sink are repairs at a time when the property had an income producing use. Therefore, a deduction can be claimed in relation to the costs incurred for these works under section 25-10 of the ITAA 1997.

Question 7

Summary

The expenses incurred by the taxpayer to replace carpet are not considered repairs and these expenses are not deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

43.   Expenses were incurred to replace carpet.

44.   Section 25-10 of the ITAA 1997 specifically deals with repairs. It allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature.

45.   Taxation Ruling TR 2022/1 Income Tax: effective life of depreciating assets (TR 2022/1) lists carpet as a depreciating asset. Therefore, the replacement of the carpet is the replacement of a depreciating asset. As such, the expense is capital in nature and not deductible under section 25-10 of the ITAA 1997.

46.   Generally, you can claim a deduction for the decline in value of a depreciating asset that is held for income producing purposes under Division 40 of the ITAA 1997 (refer to TR 2022/1).

Question 8

Summary

The expenses incurred by the taxpayer to receive a valuation for insurance purposes are not deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

47.  Expenses were incurred for a valuation inspection and report for insurance purposes.

48.   Section 25-10 of the ITAA 1997 specifically deals with repairs. It allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature.

49.  Therefore, the cost of receiving a valuation report is not deductible under section 25-10 of the ITAA 1997.

50.  The expense incurred to receive a valuation will be deductible under the general deduction provision at section 8-1 of the ITAA 1997.

Question 9

Summary

The expenses incurred by the taxpayer to sweep the chimney are not considered repairs and these expenses are not deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

51.   Expenses were incurred to sweep the chimney.

52.   Section 25-10 of the ITAA 1997 specifically deals with repairs. It allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature.

53.   TR 97 23, at paragraph 20 says:

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 in otherwise good working condition and only requires attention to prevent the possibility of its going wrong in the future, are not 'repairs' in terms of this section. Expenditure on the latter kind of maintenance work may be an allowable deduction under section 8-1.

53. Therefore, the expenses incurred to have the chimney swept are not deductible under section 25-10 of the ITAA 1997.

54. However, this expense will be deductible under section 8-1 of the ITAA 1997.