Edited version of private advice

Authorisation Number: 1052294842334

Date of advice: 21 August 2024

Ruling

Subject: Deductions - rental expenses

Question

Are the repairs to the roof, guttering and downpipes a deductible expense under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June XXXX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The taxpayer purchased a factory.

Since purchase, the factory has been continually rented.

Upon renewing the building insurance, the insurer noted that roof maintenance was required.

The insurance company identified that the roof sheeting to the building was mostly aged, with sections showing evidence of corrosion.

A qualified tradesperson was hired to provide a roof report. The report offered the following key findings:

2.1 Roof Sheets: Upon thorough examination, it was observed that a significant proportion of the roof sheets have incurred rust, necessitating their immediate replacement. In addition, it was noted that certain screws were not appropriately fastened.

2.2 Roof Tear: A tear was identified in one of the roof sheets, resulting in a small hole in the roofing structure.

2.3 Box Gutter: The box gutter exhibited significant signs of rust and deterioration. Given the extent of the damage, it was advised to replace the box gutter promptly to avoid potential water ingress and subsequent damage to the building structure.

2.5 Downpipes: Several of the 150x100mm downpipes were observed to be crushed at their base, restricting efficient water flow. Additionally, misplaced astragal plug(s) were noted.

The report concluded the following:

"Upon careful inspection, it has become evident that the roof and other aspects about the roof on this requires replacement. It is strongly advised that the necessary remedial actions be taken promptly to safeguard the building's structural integrity, prevent potential water damage, and ensure the longevity and efficacy of the roofing system."

The GST exclusive cost to complete the works was $XXXX. This expense was incurred in the ruling period.

The tenant still occupied and paid rent while the repair was being carried out.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 subsection 25-10(1)

Reasons for decision

Subsection 25-10(1) of the ITAA 1997 allows a deduction for the cost of repairs to premises solely used for income producing purposes.

The meaning of "repair" is discussed in Taxation Ruling TR 97/23- Income tax: deductions for repairs (TR 97/23).

Paragraphs 13 and 14 of TR 97/23 states:

13. 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 repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

14. 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.

In relation to whether works are a repair or replacement of an entirety, TR 97/23 states the following:

Repair is distinct from renewal or reconstruction

36. 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.

What is an 'entirety'?

37. 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), 'a physical thing which satisfies a particular notion' (the Lindsay case at 106 CLR 384; 12 ATD 201) and 'not necessarily the whole but substantially the whole of the [property] under discussion' (the Lindsay case at 106 CLR 383-4; 12 ATD 200).

Paragraph 40 of TR 97/23 provides examples of property that constitutes an entirety and examples of property that do not and states: "Something that is part of a building, e.g. a roof or a wall, is just that and no more. The building itself is the entirety."

Paragraphs 44 and 45 of TR 97/23 discuss the distinction between works undertaken that constitute an improvement to the property, and those undertaken to repair the property.

Repair is distinct from improvement

44. The meaning of 'repair' or 'repairs' is considered in paragraphs 12 to 30 of this Ruling. In the case of a 'repair', broadly speaking, the work restores the efficiency of function of the property without changing its character. 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.

45. To distinguish between a 'repair' and an 'improvement' to property, one needs to consider the effect that the work done on the property has on its efficiency of function. This is the determinative test.

Application to your circumstances

The deterioration of the roofing, guttering and downpipes shown in the "roof report" evince damage or deterioration to the existing roof, guttering and downpipes. There is general corrosion across the roof and a visible tear to the roof sheeting. The guttering is corroding in several areas and at least one section of downpipe is damaged preventing the proper flow of water.

As there was general corrosion which had already led to tearing of the sheeting, and damage to the gutters and downpipe, the works done to remedy the defects fall within the meaning of repair in TR 97/23. Additionally, as per paragraph 14 of TR 97/23 the works still constitute a repair where some of the works were undertaken for the prevention of further damage in conjunction with remedying the damage that had already occurred.

The work done restored the property to its former condition, and the materials were the same/similar or the modern equivalent to the materials of the existing roof, guttering and downpipes. This is in line with the works being a repair as per paragraphs 44-45 of TR 97/23.

As the roof is part of the building as per paragraph 40 of TR 97/23, its 'replacement' is not an entirety.

For these reasons, the expenditure incurred is deductible under section 25-10 of the ITAA 1997.