Edited version of private advice

Authorisation Number: 1052303920094

Date of advice: 11 September 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) of the ITAA 1997 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, you replaced a property fixture (which is no longer available). While you used different materials to repair the fixture of your rental property, the work was done to restore the fixture to its original function. The fixture is a subsidiary part of the building, rather than an asset in its entirety. As the fixture was 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 the fixture of 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 (husband & wife) purchased a residential rental investment property. The property is owned 50/50 as joint tenants.

The property was made available to rent on XXXX.

The property is rented with a real estate agent who determines the market value of the rent.

The property was continually rented from XXXX until XXXX when it was discovered that a fixture had been destroyed by the tenants.

The tenants were evicted for the damage and the property was then uninhabitable until repairs were made to fix the damage caused to the fixture which was in good condition when the property was originally purchased.

On XXXX you purchased new fixture.

You could not fix the damaged fixture as the product/colour no longer existed and it was not possible to repair.

The property was re rented on XXXX when all repairs were complete.

Relevant legislative provision

Income Tax Assessment Act 1997 section 25-10