Deductible repairs

Repairs to premises are deductible under s 25-10 ITAA 1936 to the extent that they are held or used for the purpose of producing assessable income.  To be deductible, the repairs must relate directly to wear and tear or other damage that occurred as a result of renting out the property.

Note: s 25-10 does not require the taxpayer to own the property, merely to use it in producing assessable income.  This means that a lessee can claim deductible repairs when the lessee incurs the expenditure.

The Commissioner examines the work ‘repairs’ in TR 97/23, stating that it has its ordinary meaning, i.e., the remedying or making good of defects in, damage to, or deterioration of, property (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

The Ruling makes the following comments with respect to repairs:

• A repair involves restoration of the efficiency of function of the property being repaired without changing its character;

• It includes 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; and

• Repairs 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.

Examples include:

• replacing part of the guttering or windows damaged in a storm;

• replacing part of a fence damaged by a falling tree branch;

• repairing electrical appliances or machinery.

The Ruling states that work done to prevent or anticipate defects, damage or deterioration is not in itself a ‘repair’ unless it is done in conjunction with a repair.

Maintenance

‘Maintenance’ is work to prevent deterioration or fix existing deterioration.  The Ruling states that work done to property not in need of repair is not repair work and any expenditure for the work in these circumstances is not deductible under s 25-10.  However, it states that some kinds of maintenance work are ‘repairs’, including painting plant or business premises to rectify existing deterioration and to prevent further deterioration.

The Ruling states that oiling, brushing or cleaning something that is otherwise in good working condition are not ‘repairs’.  However a deduction may be permitted under s 8-1.

Ongoing v initial repairs

The cost of repairing defects, damage or deterioration in existence at the date of acquisition of property is not deductible.  It is capital expenditure and is therefore disallowed by s 25-10.  This is the case even if income is earned by the time the repair is conducted.

Note that these expenses may be eligible for capital works deductions, or may be included in the cost base of the asset for CGT purposes

Restoration v improvement

TR 97/23 acknowledges that to repair property improves to some extent the condition it was in immediately before repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible.  The Commissioner considers that a minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair.

The Commissioner considers that 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. The following factors may point to work done being an improvement include:

• whether the work will extend the property’s income producing ability;

• whether the work will significantly enhance the property’s saleability or market value; or

• whether the work will extend the property’s expected life.

Replacement or substantial reconstruction of the entirety, as distinct from the subsidiary parts of the whole, is an improvement (see below).

Replacing of part v entirety

If a repair replaces something in its entirety, the expense will be capital in nature and non-deductible.  TR 97/23 states that property is more likely to be an entirety if:

• it is separately identifiable as a principal item of capital equipment;

• it 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; 

• it is a separate and distinct item of plant in itself from the thing or structure which it serves; or

• it is a ‘unit of property’ as that expression is used in the depreciation deduction provisions.

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.

For example:

• replacement of a whole fence rather than replacing damaged palings would be considered capital expenditure and non-deductible;

• replacement of a stove, kitchen cupboards or a refrigerator is not a repair.

However, in the above circumstances, a capital allowance deduction may be available.

The cost of replacing items such as locks and exhaust fans, which are permanent fixtures installed in rental property is deductible as a repair under s 25-10 provided it is a replacement of a worn out unit by a new unit of a similar design that simply restores its efficiency of function and is not an improvement (see TR 97/23).