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Ruling
Subject: rental repairs
Question
Are you entitled to a deduction for restumping your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You own a rental property.
You became aware of the general damage that had occurred to the property both inside and out.
Urgent action was taken to remove the tenants and a full assessment of the damage was carried out in conjunction with a property agent.
An expert opinion determined that the house required complete restumping.
The original stumps were timber however it was recommended by tradesman that concrete stumps be used as they cost less and are the modern equivalent.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-10.
Reasons for decision
Summary
As the restumping of your rental property is considered a repair you are entitled to a deduction under section 25-10 of the ITAA 1997.
Detailed reasoning
Section 25-10 of ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature.
Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves the restoration of the efficiency of function of the property being repaired without changing its character. A repair will merely replace a part of something or correct something that has become worn out or dilapidated.
According to TR 97/23, expenditure for repairs to a property will be considered capital in nature and not deductible under section 25-10 of the ITAA 1997 if they provide a greater efficiency of function. Works will also be considered capital if they represent a renewal or reconstruction of an entirety, rather than a replacement of subsidiary parts of a whole.
It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work done to a property involves an enhancement arising from the use of more modern materials and it does not change the property's character, the expenditure can still be characterised as a repair.
In your case, the foundations of your rental property were damaged by tenants resulting in major movement in the property's flooring and structure. After obtaining expert advice you arranged for the property to be completely restumped. The original stumps were timber, however on recommendation from tradesmen they were replaced with concrete stumps. The restumping does not constitute an improvement to the property as concrete stumps are considered the modern equivalent of timber stumps. The restumping is not considered a replacement of an entirety as the stumps form only a part of the property.
The restumping undertaken is considered a replacement to restore the efficiency of function of the property. Therefore, you are entitled to a deduction for the expenditure incurred to restump your rental property under section 25-10 of the ITAA 1997.
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