Replacing ducted A/C - repair?

In an IP this year, replaced an old ducted A/C system that died. Cost ~ $8k. With such a large expense, first thought is it's capital, but seems to me by the ATO's own definition, that's a repair. It is 'replacing something that is worn out, damaged or broken as a result of renting out the property'.

Had same thing this year with replacing oven, cook top exhaust fans and HWS. Everything died this year. Given there's an automated warning on claiming repairs > $3,500, assume I'll be red flagged...

 

What parts of the A/C were replaced? Just the ducting or did the condenser and fan coil units get replaced too? Pretty sure this would be considered capex if the whole system was replaced.

 

Yes, it is a replacement of a broken one. ATO definition 'replacing something that is worn out'.

I don't think there are degrees of replacement. NB - it is not an improvement.

 

Its a replacement depreciable asset. So its a new Div 40 asset with reference to the Commissioners schedule. The former asset may be eligible to be scrapped. You are misreading the ruling or not reading it at all Replacement of a part v replacement of the entirety is well discussing in TR 97/23. Especially read Para 33 which names many of the specific items you named as "claimed". The Commisisoners table of depreciable assets is a guide to what to depreciate in lieu of deduct. Items NOT in that schedule may however be considered.

There are numerous paragraphs which dont agree with this view in the ruling

There are degrees of replacement. Refer to para 34. Also Para 37+ which govern minor items like...exhaust fans, locks etc. These will typically fall under $300 anyway.

 

When the lessor replaces $500k of chiller (one of 3 chillers in the system) but not the control gear or supply fans, boiler, ductwork, dampers etc, is that a repair or capital depreciable asset?

 

A chiller is a seperate asset. Its listed in the effective life table and the relevant user business use needs to be considered for the effective life.

If the one chiller was a integral element of a complete system that includes three and part of a complete system it may be a repair - Para 37+ considers what entirety means. One of three chillers may be a element of a line and if it was to fail and the system is non-fuctional or poorly functions it is more likely to indicate it is a part of the entirety being repaired. However each chiller is a seperate asset.

I would also consider why it is replaced. If it is a preventative replacement it may fail the "repair" test and the two limb test in para 20 . If it was replaced as it may soon fail due to age and condition it isnt a repair which makes the cost depreciable. I see that with a major chook processor and a drug company. Each spend a mint on air handling and their prime contractor regularly seeks tax advice prior to costs being incurred. The bean counters run the production and willingly spend when they must but if they can avoid it they certainly do. So maintenance comes first, then defect repairs, then replacement deductibles then replacement depreciable. They also risk assess repairs v replacement for things like warranty and service life costs. A committee of experts decides.

Given the material value if declined it may be wise to seek advice and even a private ruling or retain more specific evidence prior to claiming a deduction if that is given advice.

 

Ok thanks @Paul@PAS and @norwoodman. Makes sense...did suspect it was capital. I'll double check the invoicing to determine the extent of what was replaced.

 

That said... If I have owned a rental property for ten years and the roof tiles have deteriorated and are wind damaged in a storm and its cheaper, faster, better to replace all the roof tiles with brand new tiles can I deduct this ? Yes most likely. The roof is a part of the building and repairs a defect. Care must be taken with this view however. There are cases where it may be non-deductible eg initial repairs, property being renovated for sale etc.

Note in this example prudent tax advice may be to have the QS assess the existing value in the roof tiles that are being replaced. (If any). This may allow more than 100% to be deductible as the new roof cost + the scrapping of the old roof tiles may both be a deduction.