1 Is the amount for the removal of asbestos and grout a deductable expense?
1 Yes. Question 2 Is the amount for the demolition of damaged walls, roofing, and flooring deductable as a repair? Answer 2 No. Question 3 Is the full amount for the disconnection of existing hot water system and kitchen appliances while works were completed and repairing existing wiring deductable as a repair? Answer 3 No. Question 4 Is the full amount for the disconnection of existing split system and repairing/replacing existing wiring deductable as a repair? Answer 4 No. Question 5 Is the amount for repairing or replacing existing wiring deductable as a repair to the extent the expenditure can be separately identified? Answer 5 Yes. Question 6 Is the amount for the surface preparation for new flooring and finishes deductable as a repair? Answer 6 No. Question 7 Is the amount for the removal/disposal of existing items (windows etc.) deductable as a repair? Answer 7 No. Question 8 Is the amount of non-depreciable works and items (tools, excavation, soil etc.) used during renovation deductable as a repair? Answer 8 No. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
You purchased a property a number of years ago and have rented it to tenants since purchase. You undertook extensive renovations to your rental property during the income year. A quantity surveyor was engaged to calculate the value of the improvements which would form the cost base available to you to which Division 43 Capital Works allowance would apply. The Quantity Surveyor's report lists an amount as the costs of the additional works for capital works, and an amount for depreciable items such as bathroom items, fans, lights, blinds, carpet, lino etc. In preparing the report the quantity surveyor excluded certain expenses on the basis they did not form part of the costs of depreciable items and could be characterised as repairs and maintenance or other costs not included in the cost base for depreciation. These costs were noted as follows: • Removal of Asbestos and Grout Asbestos was removed from the external eaves. Full surround of the house was asbestos sheet eaves including grouting for weatherproofing. • Demolition of damaged walls, roofing, and flooring
The external cladding was fully replaced. Old weatherboard cladding was old and was severely damaged by exposure over time - non repairable. The corrugated iron roof was old and was severely damaged by exposure over time - non repairable. All lino and carpets were removed and replaced (like for like). Bathroom subfloor and walls to approximately 1 metre from floor required full replacement due to moisture damage overtime. Some internal plasterwork required replacement through damage over time (sagging/cracking) or damaged as result of works undertaken to replace windows and/or flooring and skirting. • Disconnection of existing hot water system and kitchen appliances while works were completed and repairing of existing wiring • Disconnection of existing split system and repairing/replacing existing wiring • Surface preparation for new flooring and finishes • Surface preparation relating to flooring before finishings (lino and carpet) • Removal/disposal of existing items (windows etc.) Disposal of corrugated iron roofing, windows, plaster, carpets, lino, bathroom tiles etc.
• Additional non-depreciable works and items (tools, excavation, soil etc.) used during renovation Demolition of old external laundry & removal (was 3 meters off the rear of the house). Landscaping relating to removal of concrete flooring of laundry and levelling around laundry area and around house following removal and reinstatement of weatherboard cladding.
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 section 40-180 Income Tax Assessment Act 1997 section 40-190 Income Tax Assessment Act 1997 section 40-755 Income Tax Assessment Act 1997 section 43-10 Income Tax Assessment Act 1997 section 43-20 Income Tax Assessment Act 1997 section 43-30
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. As such the Commissioner has considered if the works are repairs or if they are capital in nature and presented from being deducted as repairs. Repairs The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co v. FC of T (1965) 115 CLR 58, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.
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. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) deals with the issue of deductions for repairs. Paragraphs 15-16 of TR 97/23 states: • 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.
• To repair 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. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible section 25-10 of the ITAA 1997. • TR 97/23 provides that expenditure for repairs to property is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of the entirety (paragraphs 36-42), or the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair' (paragraphs 44-58). 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 TR 97/23 clarifies what repairs are in the context of section 25-10 of ITAA 1997: 22. ... The work may go beyond 'repairs' in terms of the section If it: a) changes the character of the property; or b) does more than restore its efficiency of function. 32. Expenditure for repairs to property is capital expenditure if any of the following subparagraphs applies: ..... c) The expenditure, rather than being for work done to restore the property by renewal or replacement of subsidy parts of a whole, is for work that is a renewal in the sense of reconstruction of the entirety... TR 97/23 gives the Commissioner's views on the meaning of 'entirety': 37. 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 FCT
(1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201), "a physical thing which satisfies a particular notion" (the Lindsay case at 106 CLR 384; 12 ATD 201) and "not necessarily the whole but substantially the whole of the [property] under discussion" (the Lindsay case at 106 CLR 383-4; 12 ATD 200). There is no one correct test for what is a subsidiary part and what is an entirety. Which approach to adopt depends on the facts in each particular case and, even then, the question is one to be answered in the light of all the circumstances it is reasonable to take into account ... 38. Property is more likely to be an entirety if: • the property is separately identifiable as a principal item of capital equipment; or • the thing or structure is an integral part, but only a 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 in itself 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. 39. Property is more likely to be a subsidiary part rather than an entirety if: • it is an integral part of some larger item of plant; or • the property is physically, commercially and functionally an inseparable part of something else. Improvement Paragraphs 44 to 47 of TR 97/23 discuss improvements. An improvement provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life. Paragraph 46 states:
If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to consider, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property. • Repairing property means fixing something that is broken or damaged. It does not necessarily make the property better than it was before, but it does make it function the way it is supposed to. • Improving property means making it better than it was before. This could mean adding new features, making it more efficient, or making it more valuable. Environmental protection activities
Under section 40-755 of the ITAA 1997 you can deduct expenditure you incur in an income year for the sole or dominant purpose of carrying on environmental protection activities. These activities include those relating to the removal of hazardous or toxic materials. Decline in value (Capital allowances) Section 40-25 of the ITAA 1997 allows deductions for the decline in value of depreciating assets to the extent the asset's decline in value is attributable to its use, or it being installed ready for use, for a taxable purpose. Subsection 40-30(1) provides that a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over 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.
Where a depreciating asset cost less than $300 you are able to claim an immediate deduction rather than depreciate the asset over a period of time where the asset has been used for income producing activity. The immediate deduction is available if all of the following tests are met in relation to the asset: • it cost $300 or less and you used it mainly for the purpose of producing assessable income that was not income from carrying on a business (for example, rental income where your rental activities did not amount to the carrying on of a business of letting rental properties) • it was not part of a set of assets costing more than $300 that you started to hold in the income year, and • it was not one of a number of identical, or substantially identical, assets that you started to hold in the income year that together cost more than $300. Subdivision 40-C of the ITAA 1997 contains the rules relating to the first and second 'element of cost' in relation to depreciating assets. Capital works
Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to building and structural improvements where a residential property is used for income producing purposes pursuant to section 43-20 of the ITAA 1997. TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: • the extent of the work carried out represents a renewal or reconstruction of the entirety, or • the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or • the work is an initial repair. Section 43-10 of the ITAA 1997 provides that a taxpayer can only claim a capital works deduction if: • the capital works have a construction expenditure area; and • there is a pool of construction expenditure for that area, and • the taxpayer uses the area in the income year in the way set out in the table in section 43-140 of the ITAA 1997. Broadly, this requires the area to be used to produce assessable income.
In addition, a taxpayer is required to have completed the construction of the capital works before claiming a deduction under Division 43 of the ITAA 1997. Under section 43-30 of the ITAA 1997, a taxpayer is denied a deduction for capital works until construction of the capital works is completed. This is notwithstanding that a taxpayer may use the capital works or part of them before completion. Apportionment Paragraph 55 to 57 of TR 97/23 covers repairs done at the same time as improvements. 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. 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 affected from the capital cost of the improvements.
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. Application to your circumstances You have advised that: • The works included replacing the roof, windows, weatherboards, Bathroom works etc. • The work undertaken was an extensive renovation which you consider to constitute Capital Improvements and have been included in the Quantity Surveyors report. • Removal of Asbestos and Grout. The asbestos remediation is deductible as an environmental protection activity under section 40-755 of the ITAA 1997. As the grouting was related to the removal of the asbestos the full amount is an allowable deduction. • Demolition of damaged walls, roofing, and flooring In the information provided to the Commissioner you have said this work was classified as capital works. The amount would be capital and can form part of the cost base of the property.
• Disconnection of existing hot water system and kitchen appliances while works were completed and repairing existing wiring Disconnection of existing hot water system and kitchen appliances will be treated as capital and can be added to the cost base. The repairing of existing wiring will be deductible if you are able to apportion the cost. If you are not able to apportion this amount it will form part of the cost base. • Disconnection of existing split system and repairing/replacing existing wiring The disconnection of the existing split system will be treated as capital and added to the cost base. The repairing/replacing the existing wiring will be deductible if you are able to apportion the cost. If you are not able to apportion this amount it can be included in the cost base. • Surface preparation for new flooring and finishes
These expenses relate to the installation of depreciable assets (lino and carpets) and are therefore not considered to be repairs. Depending on the exact nature of the work undertaken, these costs may be added to the cost base of the property or added to the 'second cost element' of the depreciable assets (see section 40-190 of the ITAA 1997). • Removal/disposal of existing items (windows etc.) These expenses would follow the type of work that was carried out. You say the work was capital and these expenses are therefore capital. No part of the expenditure can be identified as being a repair. • Additional non-depreciable works and items (tools, excavation, soil etc.) used during renovation This amount is capital and added to the cost base. No part of the expenditure can be identified as being a repair.