Edited version of private advice

Authorisation Number: 1052291007997

Date of advice: 19 August 2024

Ruling

Subject: Deductibility of repairs

Question 1

Are the costs incurred on remedial works on a residential property deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the costs incurred on repainting the ceilings of a neighbouring residential property deductible under section 25-10 of the ITAA 1997?

Answer

No.

Question 3

If not, are the costs incurred on repainting the ceilings of a neighbouring residential property deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

For income year ended 30 June 20XX

Relevant facts and circumstances

The taxpayer owns a residential unit which they acquired over a decade ago. For the entire period of ownership, the property has been tenanted during which the taxpayer derived rental income. This is with the exception of a short period of time in an income year, which was several years prior to 20XX, where the property was let to a dependant of the taxpayer on a 'payment of costs' basis.

Remedial Work - Taxpayer's Unit

The taxpayer fielded complaints from the property owner of a neighbouring unit advising that water was leaking into their property from the taxpayer's balcony. Upon further checks it was found that the balcony membrane of the taxpayer's unit had failed.

Remedial work was undertaken to the balcony of the taxpayer's unit, including the following:

• Removal of balcony tiles and floor bed.
• Removal and replacement of sheet flooring.
• Supply and install new waterproofing membrane.
• Supply and install sand and cement bedding.
• Install floor tiles, skirting tiles and door hob tiles.

In addition, work was undertaken to replace the timber balustrade on the balcony. The bottom rail and balusters were experiencing wet rot. Work was required to:

• Removal and dispose of existing timber bottom and balustrades.
• Supply and install new timber handrail, bottom rail and balusters.

The balcony is not part of the common property of the building, and is owned by the taxpayer.

Repainting work - Neighbour's Unit

In respect of the neighbour's unit, the ceilings in this unit were damaged where water had come in from the taxpayer's unit. The ceilings in this unit required repainting.

The ceilings in the neighbour's unit are not common property of the building, and are owned by the property owner of this unit. The taxpayer was not reimbursed by the property owner of this unit.

The specified work to the taxpayer's unit and the neighbour's unit was completed.

Payments totalling $xxx were made in respect of the specified works to the taxpayer's unit and the neighbour's unit.

Relevant legislative provisions

Income Tax Assessment Act section 8-1

Income Tax Assessment Act section 25-10

Reasons for decision

Question 1

Detailed reasoning

Deductibility of remedial work expenditure of the taxpayer's unit under section 25-10

Subsection 25-10(1) of the ITAA 1997 allows a deduction for expenditure incurred for repairs to premises or part of premises that is held or used solely for the purpose of producing assessable income. Expenditure incurred for repairs is not deductible to the extent that it is of a capital nature (subsection 25-10(3)).

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 word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repairs (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property (paragraph 13 of TR 97/23).

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 (paragraph 14 of TR 97/23).

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 (paragraph 15 of TR 97/23).

It is acknowledged in TR 97/23 at paragraph 16 that to repair 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. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10.

TR 97/23 explains that a repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction, as distinguished from repair, is restoration of the entirety. In respect of the term 'entirety', where something is part of a building, the building is the entirety. For example, a roof or wall is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety' (paragraph 40 of TR 97/23).

TR 97/23 points out that it is not a specific requirement of section 25-10 that property be owned by the taxpayer. However, entitlement to a deduction under section 25-10 for expenditure incurred by a taxpayer for repairs to property depends on whether the taxpayer held or used the property for income purposes.

Also, repair expenditure, incurred by a taxpayer in a year of income on property held, etc., in earlier years for non-income purposes, can qualify for deduction under section 25-10 if the property is held, etc., for income purposes when the repair expenditure is incurred.

This is even though some or all of the defects, damage or deterioration arise from, or are attributable to, the taxpayer's holding, etc., of the property before its holding, etc., for income purposes - see paragraph 76 and paragraph 146 of TR 97/23.

In the present circumstances, the taxpayer owned the rental property for more than a decade. The property was tenanted out for the entire period and used to produce rental income, apart for a short period in an income year, several years prior to the year when the work was undertaken.

In the 20XX income year, work was undertaken to the balcony to repair the damage caused by the failing balcony membrane. This included replacing the waterproofing membrane and retiling the balcony. In addition, work was undertaken to replace the balustrade which was damaged as a result of wet rot.

It is considered that the work undertaken to the balcony and balustrade are repairs as the work remedied the defective waterproofing and deteriorating balustrade. Although there may be some improvement because new materials are used, this represent a minor and incidental improvement. The balcony and balustrade's essential efficiency of function has not changed nor has the character of the balcony and balustrade.

Consequently, a deduction is allowable under section 25-10 for the costs incurred on remedial works undertaken to Unit 4.

Question 2

Detailed reasoning

Deductibility of repainting Unit 2 under section 25-10

In relation to the neighbouring property, the taxpayer expended monies in repainting damaged ceilings inside this property. As mentioned earlier in this document, one of the requirements for a deduction under section 25-10 is that a taxpayer must have held the property or used the property for income producing purposes.

As the Taxpayer has not held or used Unit 2 for income producing purposes, the cost of repainting the ceilings in Unit 2 is not deductible under section 25-10.

Question 3

Detailed reasoning

Deductibility of repainting Unit 2 under section 8-1

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Expenses that are 'incidental and relevant' to the taxpayer's income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction under section 8-1 (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).

In your case, the water damage caused to the neighbouring property by the failing balcony membrane occurred while the taxpayer's property was earning assessable rental income. Therefore, the expense incurred in repainting the ceilings to repair the damage is accepted as being incidental and relevant to the taxpayer's income earning activities.

Accordingly, the amount expended on repainting the ceilings in Unit 2 is deductible under section 8-1.