ATO Interpretative Decision

ATO ID 2001/219 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as the interpretative issue is covered in the Rental Property Guide.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer entitled to a 100 per cent deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the replacement of a damp proof course in a duplex where only the ground level unit is used for income producing purposes?

Decision

No. The taxpayer is entitled to claim a 50 per cent deduction under section 25-10 of the ITAA 1997 for the replacement of a damp proof course in a duplex where only the ground level unit is used for income producing purposes.

Facts

The taxpayer lives in the top floor unit of the duplex and the ground floor unit was let for the entire financial year at a commercial rate.

A new damp proof course was installed to replace the existing damp course which had disintegrated over the years that the premises were used for income producing purposes.

Reasons For Decision

Section 25-10 of the ITAA 1997 provides that the cost of repairs may be deductible for premises used for income producing purposes. If however the work done amounts to an improvement to the premises rather than a repair then the cost is a capital expense and no deduction is allowable.

The installation of the damp proof course in this case is not considered to be an improvement. It is repairing an existing part or function of the building. It does not cease to be a repair even though it is done largely to prevent further damage and deterioration.

The installation of a new damp proof course is a repair with more modern materials. It will simply restore the efficiency of the damp proof course. Replacing the damp course is a repair under section 25-10 of the ITAA 1997.

As the property in this case is only used partly for income producing purposes we have to consider apportionment of the cost under subsection 25-10(2) of the ITAA 1997.

The building in question is a duplex where the taxpayer lives in the top unit and the tenants in the ground floor unit. The damp course is designed to prevent rising damp and structural problems to the whole building, not just the ground floor. It cannot be said that this repair relates wholly to the income producing area of the property.

The issue of apportionment has been the subject of considerable income tax case law. The essential principles underlying that case law emerged from the High Court decision of Ronpibon Tin NL v. FC of T (1949) 78 CLR 47 (the Ronpibon Tin Case). The relevant principle established by the Ronpibon Tin Case for income tax purposes is to apportion on the basis of the actual application or purpose of the expenditure where it is possible to do so. That is, where 'distinct and severable parts' are devoted to different purposes, apportion on the basis of those purposes. Where apportionment on the basis of actual application or purpose is not possible, a 'fair and reasonable' basis is to be used.

In this case the repair of the damp course has equal application to both the income producing and private purpose parts of the building. The Commissioner considers it fair and reasonable therefore to allow 50 per cent of the cost of repairing the damp course as a deduction under section 25-10 of the ITAA 1997.

Legislative References:
Income Tax Assessment Act 1997
   section 25-10
   section 25-10(2)

Case References:
Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation
   (1949) 78 CLR 47

Keywords
Rental expenses
Repairs & maintenance expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  21 August 2001

ISSN: 1445-2782