Edited version of private ruling

Authorisation Number: 1011495451658

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Ruling

Subject: rental property expenses

Question

Are you entitled to a deduction for the cost of replacing power poles on your rental property?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You own a rental property.

Power is supplied to the rental property via power poles for which you and your neighbour are jointly responsible.

Circumstances caused some power poles to fall.

The power poles were replaced using the same materials as the original ones, being timber poles.

The work was carried out by private contractors.

You paid for your share of the cost.

No insurance claims were made.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Summary

It is considered that the work undertaken to replace the power poles on your rental property is a deductible repair.

Detailed reasoning

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income-producing purposes.

Subsection 25-10(3) of the ITAA 1997 precludes a deduction for repairs where the expenditure is of a capital nature.

The word 'repair' is not defined within the tax legislation. Accordingly, it takes its ordinary meaning. 'Repair' involves a restoration of a thing to a condition it formerly had without changing its character (W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58).

Taxation Ruling TR 97/23 deals with the issue of deductions for repairs.

TR 97/23 provides that expenditure for repairs to property is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of the entirety (paragraphs 36-42), or the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair' (paragraphs 44-58).

An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' (Lindsay v. Federal Commissioner of Taxation (1960) 106 CLR 377 at 385).

TR 97/23 gives an example, at paragraph 168, of replacing power poles as follows:

After recent bushfires the local State Electricity Authority inspects electricity poles on a number of properties. The Authority advises Mr Hogg, a pig farmer, that his electricity poles and overhead power lines are unsound, due to damage caused by the bushfires. To rectify the damage caused, he replaces these with underground cables. The cabling is a part of a larger system by which electricity is brought to the farm, distributed for use, and usage measured. Further, even though underground cables are better protected from future bushfires and storms, no greater efficiency of function of the electricity system is provided by the cables. Accordingly, the expenditure incurred by Mr Hogg is a repair, and deductible under section 25-10. If Mr Hogg had merely replaced the poles and cables, the expenditure incurred would also be a repair, and deductible accordingly. If the electricity connection is used for both domestic and business purposes, the deduction is limited by subsection 25-10(2) to that part of Mr Hogg's expenditure which reasonably relates to the use of the electricity connection for business purposes. (Any amount received by Mr Hogg by way of insurance or indemnity in respect of the expenditure incurred in replacing poles or overhead wires should be included in Mr Hogg's assessable income in terms of subsection 20-20(2) of the ITAA 1997 to the extent to which the expenditure is an allowable deduction.)

In your case, you replaced a number of power poles on your rental property which were damaged. The replacement is not considered a renewal or reconstruction of an entirety as it did not enhance the functionality of your power supply to the rental property rather the work undertaken merely restored it. The cost you incurred is for a repair and not capital in nature. Therefore, you are entitled to a deduction for your share of the cost of replacing the two power poles of your rental property under section 25-10 of the ITAA 1997.

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