Question

We have owned a weatherboard house as a rental property for over 40 years. Due to natural deterioration of the property and white ant destruction, over the last 2 years we have spent over $80,000 repairing the property. The property was not available for rent at this time due to the nature of the repairs. Would these costs be considered to be repairs or capital?

Answer

In order to be able to claim the costs of repairing the termite damage, you will need to demonstrate that the deterioration that occurred to the building, which subsequently required the relevant repairs, can be attributed to the period of time which you owned the property and used it for income producing purposes. A pest inspector might be able to provide you with an estimate of the period the termite damage started from.

In order to claim a deduction for the repairs the following conditions need to be met:

• The expenditure must not relate to improvements to the property (ie, you must simply be restoring the property back to its original condition);

• The damage or deterioration must have occurred while the property was being rented out; and

• The expenditure on the repairs must be incurred in an income year in which the property is being rented out.

Therefore, in order to be able to claim the costs of repairing the termite damage, you will need to demonstrate that the deterioration that occurred to the building, which subsequently required the relevant repairs, can be attributed to the period of time which you owned the property and used it for income producing purposes (during the six months).

If the costs are capital improvements, they would form part of the cost base of the rental property. They may qualify for capital works deductions under Division 43 (at 2.5% per year).

You need to also look at each expenditure separately and determine if it is a repair, a capital improvement or a separate depreciating asset (e,g, the furniture).

TR 97/23 provides some guidance as to the difference between a repair and an improvement.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.