The AAT has decided that some of the work carried out on a rental property comprised repairs (deductible) but some of the work comprised improvements (non-deductible).
The taxpayer owned a property for 25 years before renting it out in early 2008. In 2014 overflowing taps caused significant damage to the kitchen, ensuite, main bathroom and adjacent toilet and laundry. Some repair works were undertaken to the bathrooms and kitchen. In 2017, there was further flooding as a result of a shower head being broken and a flexible water pipe under a sink bursting.
In the 2018 income year, the taxpayer incurred just over $53,000 in carrying out work on the property. They contended the work constituted repairs and the whole amount was deductible.
The AAT was satisfied that removing wall tiles in the bathroom and ensuite, and to a lesser extent in the toilet and laundry, and additional work done in the toilet and laundry were repairs work and not improvements. Any improvement to the property resulting from this work was “marginal” and did not justify characterising the expenditure as non-deductible capital expenditure.
On the other hand, the AAT considered that expenditure incurred on renewing the property was capital expenditure as the work in question constituted improvements. In the AAT’s view, “the expenditure must have improved the condition of the property from what it was before it was first let out, and/or from before the water damage first occurred”.
In conclusion, the cost of materials in respect of the repairs (just over $2,800) was deductible, but the cost of materials in respect the improvements (just over $28,300) was not. However, the labour costs (totalling just over $22,000) had to be apportioned between the deductible repairs and the non-deductible improvements (something the AAT could not do from the relevant invoices). (Wulf and Commissioner of Taxation (Taxation) [2022] AATA 3094, AAT, James SM, 21 September 2022.)
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