Large rental repairs determined not deductible

When an investor commences earning assessable income for a rental property, there will inevitably be repair costs associated with the investment. The term “repairs” is not defined in ITAA 1997 (nor in ITAA 1936) and therefore has its ordinary meaning.

This approach is also taken by the Commissioner of Taxation in TR 97/23.

In the public ruling, it states that “repairs” ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired in a mechanical or physical sense.

It can involve the replacement of a part of something or a correction of something that is already there and has become worn out or dilapidated.

In the PBR (Register of Private Binding Rulings) the taxpayer has asked whether the Commissioner whether the removal and replacement of a defective roof was deductible for a rental property. Accordingly, the key question is whether the work completed had restored the functioning of the property to its former level of efficiency.

The relevant facts and circumstances were published in the ruling:

  • The property was purchased a number of years ago and necessary building and pest inspections were carried out at that time.
  • Both reports advised that vermin damage was identified to the property and recommended to be addressed before it was purchased
  • Specifically, the building report advised “structural timber pest damage was present in the roof” and
    • The pest report advised “vermin damage” was found to interior, roof and landscaping timbers.
  • In the years since the purchase of the property, the investor has carried out pest control services to continually treat the house internally.
  • After several treatments the investor eventually agreed to remove and replace the roof, as well as some wall studs and roof trusses.

In the reasons for the decision the Commissioner stated that TR 97/23 applies. Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition is constituted as “initial repairs”. The cost of effecting initial repairs on a property is not deductible as it is determined to be of a capital nature.

The rationale for denying a deduction for initial repairs is that the acquisition price would probably have been adjusted to take into account the defects of the property. The cost of the repairs is really part of the capital acquisition cost.

Also, it is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair.

Effect of decision on taxpayer

As the vermin damage existed at the time of purchase, and the initial reports recommended to replace the roof, the removal and replacement of the roof is not deductible. However, Div 43 may still apply as a capital works for the property.

Secondly, the expenses incurred by the taxpayer in the years since the purchase for ongoing pest control maintenance may also be considered an initial repair. Consequently, amendments may be necessary to disallow the deductions and apportion the costs over an effective life calculation.

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