Edited version of private advice

Authorisation Number: 1052358977623

Date of advice: 10 February 2025

Ruling

Subject: Rental deductions

Question 1

Can you claim an immediate deduction for the following list of expenses listed (Expenses 1) as repairs?

•                     security screens replacement

•                     barrier mesh and window replacement

•                     structural work to piers

•                     external painting and painting windows

•                     bathroom works including regrouting of main tiled shower recess

•                     work on faulty lights and power circuits

•                     gutter cleaning and blind rehanging

Answer

Yes.

Question 2

Can you claim an immediate deduction for the following list of items as repairs?

•                     hot water service replacement

•                     air conditioner replacement

•                     the cost of installing new fans and lights

•                     replacement of the boundary fence

Answer

No.

Question 3

Can you claim a deduction under section 40-25 of the ITAA 1997 for the decline in value for the following list of items?

•                     hot water service replacement

•                     air conditioner replacement

•                     the cost of installing new fans and lights

Answer

Yes.

Question 4

Can you claim a capital works deduction for the replacement of the boundary fence at 2.5% over 40 years?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On Date one, you purchased a property (the property). Settlement occurred shortly after.

When the property was purchased, you did not commission a building report as your sibling (Sibling A) is a builder.

Sibling A identified the property was solid and significant waterproofing works were required. You paid Sibling A to undertake the required works before the property was tenanted.

The following works were also undertaken prior to the property being tenanted:

•                     rebuilding a retaining wall

•                     improving drainage

•                     concreting rear patio

•                     repainting

•                     waterproofing external wall.

Since purchase of the property, it has been continually tenanted and used for income producing purposes.

The property was initially managed by Real Estate A. On many occasions you requested inspections through the agent. As you wished to organise required repairs, get an update- to-date report on your property investment but was continually denied access to the property.

Whilst the property was managed by Real Estate A, the only identified repair was the downstairs bedroom window jamming. Real Estate A advised that the tenants had broken the mechanism through rough use.

On the specified date, you terminated your agreement with Real Estate A and appointed Real Estate B.

Upon termination of the agreement your parent went through the property, they identified the front door jamming and it was hard to close the downstairs bedroom window. After inspecting the outside of the property, they sent you a photo of the pier at the front left of the property. The pier appeared to be cantilevering away from the wall at an angle. This is the point at which you first became aware of the issue.

Upon replacing agents and obtaining access to the property, you were unaware of any property damage issues and malicious damage caused by the tenants. You have provided a list of the damage identified at the time. The following damage was identified:

•                     congealed drug residue on the ceiling which required remedial cleaning work to remove

•                     damaged walls that required repair and painting

•                     broken windows and window spirals

•                     blocked toilets

•                     non-operational lights and fans

•                     broken air-conditioner

•                     leaking bathroom which caused structural sub floor damage

•                     broken screen locks and doors which wouldn't secure.

After the damage to the piers was identified you engaged builders who specialised in rectifying pier damage. The extent of the issue became evident from the building quote issued.

You engaged Company A to undertake the piering work because they were in the process of doing similar work on the property next door.

Since Date two, the property has been managed via an online agent platform. This platform allows you to self-manage the property in terms of inspections, financial transactions and lease issuances. You utilise this platform for the financials only.

You have chosen to organise the property inspections and arrange repairs when required yourself.

You've been on site on several occasions to work through the issues with your property, further your sibling (Sibling B) who has relevant professional qualifications has assisted.

The following works were conducted to the property:

•                     Hot water service replacement

•                     Air conditioner replacement

•                     Boundary fence replacement

•                     Fans and lights replacement (including exhaust fans, ceiling fans, interior lights and flood lights)

•                     Security screens replacement

•                     Barrier mesh and window replacement

•                     Structural work to piers

•                     External painting and painting windows

•                     Bathroom works

•                     Work on faulty lights and power circuits

•                     Gutter cleaning and blind repairs

You have not claimed any of the works on insurance.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 section 43-20

Income Tax Assessment Act 1997 section43-30

Reasons for decision

Issue 1 - Immediate deduction

Question 1

Summary

The expenses listed under the heading 'Expenses 1' relate to repairs undertaken to restore the property to the state it was in prior to being damaged by the tenants. These expenses restored the efficiency and function to the property without changing is character or improving the appearance of the property.

Detailed reasoning

Repairs

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.

Expenditure will be of a capital nature where it is incurred is for reconstruction of an entirety or repairs undertaken to remedy defects, damage or deterioration in existence when the premises where acquired.

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23), explains the principles and circumstances in which expenditure incurred for repairs is an allowable deduction.

We refer to the following:

Paragraph 15. Explains that a repair for the most part is occasional and partial. A repair merely replaces a part of something that is already there and has become worn out or dilapidated. Work carried out can fairly be described as a 'repair' if done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate 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.

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 suddenly during that time.

Paragraph 17. Advises that in determining whether work done to property constitutes 'repairs', it is more significant to consider whether the work restores the efficiency of function of the property without changing its character than it is to consider whether the appearance, form, state or condition of the property is exactly restored.

Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls. However, expenses which are capital, or of a capital nature are not deductible as repairs or maintenance.

Application to your circumstances

The repair expenses remediated the damage and deterioration to your rental property, that occurred whilst the property was used for income producing purposes. The works undertaken restored the function of the property without changing its character. Furthermore, these expenses were not defined as capital expenditure and you are entitled to a deduction under section 25-10 of the ITAA 1997.

Issue 2 - Non-allowable as immediate deductions

Question 2

Summary

The items listed under question 2, are not deductible as repair expenses under section 25-10 of the ITAA 1997.

Detailed reasoning

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.

However, subsection 25-10 (3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

We refer to the following paragraphs of TR 97/23:

Paragraph 13. Provides that the term 'repair' 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.

Paragraph 33. States that the cost of replacing things such as free-standing stoves, refrigerators and furniture in premises used for income purposes is capital expenditure and is not deductible under section 25-10 of the ITAA 1997.

Items such as those listed in paragraph 33 are items of plant, and if not permanent fixtures, these items can be depreciated over time.

Paragraph 37. Confirms that repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction is distinguishable from repair and is a restoration of the entirety. 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.

Repairs done at the same time as improvements

Paragraph 55. The character of a repair does not necessarily change because it is carried out at the same time as an improvement. It is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation, is a repair. In other words, if individual parts of the total project can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible. It must be possible to segregate the cost of the repairs actually effected from the capital cost of the improvements.

Paragraph 56. If however repair work is inextricably bound up with work of an improvement nature, and the repair work cannot be separately segregated and its cost accurately quantified independently from the cost of the improvements, we regard the cost of the entire work as being of a capital nature and not deductible.

Paragraph 57. For example, if work normally regarded as a repair, such as painting, is done to property as part of, or in conjunction with, a reconstruction and modernisation of the property, and it cannot be segregated and its cost separately quantified, it may not be deductible. It is again a question of fact and degree.

Taxation Ruling TR 2022/1 Income Tax: effective life of depreciating assets(TR 2022/1) lists hot water services, air conditioners, fans including fans and lights as depreciating assets.

Application to your circumstances

We understand that the works conducted on the property were to remediate damage from the previous tenants. However, the replacement of non-operational lights, fans, the hot water system, air conditioner and a boundary fence are a renewal and reconstruction of the entirety of these items. Therefore, you are not entitled a deduction for these expenses under section 25-10 of the ITAA 1997.

Issue 3 - Decline in value

Question 3

Summary

The items listed at question 3 are depreciating assets and you are entitled to a deduction under section 40-25 of the ITAA 1997.

Reason for decision

Decline in value

Section 40-25 of the ITAA 1997 states that you can deduct an amount for the decline in value of a depreciating asset you hold to the extent that you use it for a taxable purpose.

The term 'depreciating asset' is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Depreciating assets are those items that can be described as plant, which do not form part of the premises.

These items are usually:

•                     separately identifiable;

•                     not likely to be permanent and expected to be replaced within a relatively short period and not part of the structure

Examples of assets that deductions for decline in value can be applied to include timber flooring, carpets, curtains, appliances like a washing machine or fridge and furniture.

The decline in value of a depreciating asset starts when you first use it, or install it ready for use, for any purpose, including a private purpose.

Application to your circumstances

You have installed a hot water system, air conditioning system, fans and lights at your rental property. These items meet the definition of depreciating assets. Therefore, you can claim a deduction from the time they are installed and ready to use for the purpose of producing assessable income under section 40-25 of the ITAA 1997.

Question 4

Summary

The installation of the boundary fence at your property meets the definition of capital works for the purposes of Division 43. You can claim a deduction of 2.5% over 40 years from the time when construction of the fence is completed.

Detailed reasoning

Division 43 of the ITAA 1997, provides a deduction for capital works attributable to a construction expenditure area that is owned or leased by the taxpayer and used during the income year for the purposes of producing assessable income.

For works commenced after 26 February 1992,the rate of deduction for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works.

Application to your circumstances

The installation of the boundary fence is a structural improvement to your rental property. As a result, you can claim a deduction of 2.5% over 40 years from the time construction of the fence is completed. The cost of the deductions cannot be greater than the construction expenditure incurred.