Issue
Is the taxpayer entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of initial repairs to a tenanted rental property that they acquired under a will?
Decision
No. The taxpayer is not entitled to a deduction under section 25-10 of the ITAA 1997 for the cost of initial repairs to the rental property because the expenditure on the repairs is capital in nature.
Facts
The taxpayer inherited a tenanted rental property under a will.
The property was in a state of disrepair when the taxpayer inherited the property.
The taxpayer incurred costs in carrying out repairs to the rental property while it was tenanted to remedy the defects which existed at the time they inherited the property.
Reasons for Decision
Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises held or used for the purpose of producing assessable income. No deduction is allowable for capital expenditure under this section.
Initial repairs relate to the remedying of defects, damage or deterioration to a property that existed at the time of acquisition and did not arise from the operations of the taxpayer who incurs the repair expenditure (paragraph 4 Taxation Ruling TR 97/23). While TR 97/23 refers to property acquired by purchase or obtained under lease or licence, the principles apply equally to property acquired under a will ( Case V83 88 ATC 580; (1988) 19 ATR 3540; (1962) 10 CTBR (NS) Case 72 ).
Taxation Ruling TR 97/23 at paragraph 59, confirms that expenditure incurred on initial repairs is capital expenditure and is, therefore, not deductible under section 25-10 of the ITAA 1997. This paragraph also states that the cost of effecting initial repairs is still not allowable even if some income has been earned before the repair expenditure is incurred. In other words, the character of initial repairs is not altered because income is derived from the property before the expenses are incurred on the initial repairs.
As the property was in a state of disrepair at the time of acquisition by inheritance and none of the defects arose in the course of the taxpayer renting out the property, the repairs carried out by the taxpayer are initial repairs and capital in nature. This is so regardless of the fact that the property was previously used as a rental property before it was inherited by the taxpayer.
Accordingly, the taxpayer is not entitled to a deduction, under section 25-10 of the ITAA 1997, for the cost of the initial repairs to a tenanted rental property that they acquired under a will.