Edited version of private advice

Authorisation Number: 1052279700302

Date of advice: 23 July 2024

Ruling

Subject: Rental property deductions

Question

Can you claim a deduction for the cost of the repair work completed on your rental property?

Answer

Yes. Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes.

However, subsection 25-10(3) does not allow a deduction for repairs where the expenditure is of a capital nature.

The following are examples of expenses which are capital 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.

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.

Paragraph 50 of 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, while you used different materials to repair parts of your rental property, the work was done to restore the fixtures to their original function. The fixtures are a subsidiary part of the building, rather than an asset in its entirety. As the fixtures were in a good state at the time you purchased the property, the work done was not an initial repair.

Therefore, you can claim a deduction for the cost of the repair and restoration work completed on your rental property.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XXXX you purchased a residential rental investment property.

The property was made available to rent on XXXX.

The property is rented with a real estate agent.

The property is rented at commercial rates for short term tenancy.

During the XXXX financial year, you engaged a builder to commence repair works on rusted and weathered fixtures.

The tax invoice from the builder noted 'repairs and rectification works' to your rental property.

There was no damage visible to the fixtures at the time of acquisition. The damage became visible after the property acquisition when it was pointed out to you by the estate agent. You were advised by the builder to undertake the replacement work as soon as possible otherwise the job would become even bigger if the fixtures became more weathered and damaged.

The total cost of the repair work was $XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10