Are the expenses incurred in repairing damage to an investment property deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) as repairs?
Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commences on: 20XX
You purchased the investment property X years ago. Since the date of acquisition, it has been tenanted or available for rent. The roof of your property was damaged, possibly due to high winds which lifted some of the roof sheets causing moisture build up and rust. The leaking roof caused damage to internal walls. The roof was initially repaired/made safe as a temporary fix. Later the existing roof on the main section of the building was replaced. The roof on the remainder of the building was not replaced as it was still in good condition. You incurred the following expenses: temporary repair - $ X part roof replacement - $ X The internal walls were repaired to stop the leaks and further internal damage. You incurred expenses. You also incurred $X in remediating damage to electrical cabling damaged by rodents. Apart from the rodent damage, the wiring appeared to be in good condition. You have not received, nor will you receive insurance payments in relation to any of the above.
Income Tax Assessment Act 1997 section 25-10
All references made in these reasons for decision are to the Income Tax Assessment Act 1997 unless otherwise stated. Summary The expenses incurred in repairing damage to your investment property are deductible under section 25-10 as repairs. Detailed reasoning Section 25-10 allows a deduction for the cost of repairs to premises used for producing assessable income to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the circumstances in which expenditure incurred for repairs are an allowable deduction under section 25-10. As the word repair is not defined within taxation legislation it takes its ordinary meaning. Paragraphs 13 - 16 of TR 97/23 specifically deal with the 'ordinary meaning of repairs'. The word repair 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.
A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. A repair restores the efficiency of function of the property without changing its character. In contrast, TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: • the work is an initial repair, • the extent of the work carried out represents a renewal or reconstruction of the entirety, or • the works result in an 'improvement' rather than a 'repair'. An initial repair According to paragraph 125 of TR 97/23, a repair after the acquisition of property is an initial repair if the repair was due when the property was acquired, in the sense that there was a need for repair to restore or maintain the property's efficiency of function. That is, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended.
The property was suitable for income purposes in the way intended because it has been tenanted or available for rent since you purchased it. Therefore, the replacement of the damaged part of the roof, work on the internal walls and remediation of the electrical cabling are not initial repairs. Renewal or reconstruction of the entirety Property is more likely to be an entirety if the thing or structure is an integral part of entire premises and can provide a useful function without regard to any other part of the premises. In contrast, the thing or structure is more likely to be a subsidiary part, rather than an entirety, if it is physically, commercially, and functionally an inseparable part of something else. Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'. The work done on the roof, walls and electrical cabling are not the renewal or reconstruction of an entirety. An improvement From paragraphs 120 to 124 of TR 97/23 the relevant considerations to determine whether work carried out constitutes an improvement or a repair, are whether:
the thing replaced or renewed was a major and important part of the structure of the property, the work performed did more than meet the need for restoration of efficiency of function, bearing in mind that repair involves a restoration of a thing to a condition it formerly had without changing its character, the thing was replaced with a new or better one, and the new thing has considerable advantages over the old one, including the advantage that it reduces the likelihood of repair bills in the future. Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is the restoration of a thing's efficiency of function (without changing its character) rather than the exact repetition of form or material that is significant. 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.
The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital. If the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement. The work on the roof and internal walls restored the efficiency of the property's function. There is no increase to its efficiency or change in its character. Similarly, the work done to the electrical circuit, was to restore the efficiency of its functioning, rather than improve it. Consequently, the expenses incurred in repairing damage to your investment property are deductible under section 25-10 as repairs.