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Edited version of private ruling
Authorisation Number: 1011505087291
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Ruling
Subject: Rental property expenses
Question 1
Are you entitled to a deduction for expenses incurred to replace the pool liner for your pool on your rental property?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
You have owned and rented the rental property.
You state the house was built a number of years ago and from a property inspection report you identified that the in-ground concrete pool was installed around the same time the property was built. There were no defects identified at the time of purchase.
You have had regular maintenance carried out on the pool since purchase of the property.
You later found the pool liner was cracked and had deteriorated during a maintenance visit and advised it could not be repaired. The pool liner was several years old and due to the loss in flexibility and age, the liner required replacing.
You have incurred costs to replace the pool liner and have provided an invoice for the amount paid.
Summary
It is accepted that the costs incurred to replace the vinyl pool liner is deductible as a repair under section 25-10 of the ITAA 1997.
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. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. Therefore, to qualify for a deduction under section 25-10 of the ITAA 1997 the expenditure must:
· be a repair
· not be expenditure of a capital nature; and
· be in respect of an asset used in the production of assessable income.
The meaning of repairs
The word 'repairs' is not defined in the ITAA 1997. In its context in section 25-10 of the ITAA 1997, the word 'repairs' bears its ordinary meaning. Paragraphs 13-16 of Taxation Ruling TR 97/23 specifically deal with the 'ordinary meaning of repairs'. The word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damaged or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.
TR 97/23 refers to the case of W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR; (1965) 14 ATD 78; 1965 9 AITR 710, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.
Capital nature
TR 97/23 indicates that expenditure for repairs to property is of a capital nature where:
· the work is an initial repair; or
· the extent of the work carried out represents a renewal or reconstruction of the entirety, or
· the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair'.
What is entirety?
Paragraph 38 of the TR 97/23 explains that a property is more likely to be an entirety if:
· the property is separately identifiable as a principal item of capital equipment; or
· the thing or structure is an integral part, but only a part, of the entire premises and is capable of providing a useful function without regard to any other part of the premises; or
· the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or
· the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.
Repair or improvement
Paragraph 45 of TR 97/23 distinguishes between a 'repair' and an 'improvement' to property which one needs to consider the effect that the work done on the property has on its efficiency of function.
If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property.
You have an in-ground concrete pool that was installed some years ago and during a maintenance inspection it was found that the vinyl pool liner had deteriorated and was cracked. Due to the loss in flexibility and age, the liner could not be repaired and a new vinyl pool liner installed. The pool liner is a part of the pool and not the pool in its entirety.
In your case, the replacement of the vinyl pool liner does not result in a greater efficiency of function of the pool and is therefore not a renewal or construction of the entirety. It is not considered to be an improvement or an initial repair. The pool liner is a function of the pool and was replaced due to its deterioration and age and to restore the pool to its previous condition.
Accordingly, the cost incurred to replace the vinyl pool liner is deductible as a repair under section 25-10 of the ITAA 1997.
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