Edited version of private advice

Authorisation Number: 1052312626203

Date of advice: 1 October 2024

Ruling

Subject:Rental Property Repairs

Question

Are you entitled to a deduction for the cost of demolishing kitchen cabinets?

Answer

No.

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.

This ruling applies for the following period

30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You are the owner of XXX investment properties.

Several of these properties have been rented since November/December XXXX.

One of your properties had damaged kitchen cabinets.

During the XXXX-XXXX income year, you decided to replace the damaged kitchen cabinets in their entirety with all new kitchen cabinets instead of repairing them.

On XX February XXXX the kitchen cabinet was demolished at the price of $XXXX

The new kitchen cabinets were installed at a price of $XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

General principles

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.

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.

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.

'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 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.

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.

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.

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 capital, or capital in nature.

Entirety

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.

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)).

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.

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.

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.

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 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.

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).

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.

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.