Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012392285451

Ruling

Subject: Rental property expenses

Questions and answers:

Is the replacement of a subfloor retaining wall considered to be a repair and maintenance item?

No.

Is the installation of additional gutter down-pipes considered to be a repair and maintenance item?

No.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You purchased a house.

You did not get a pre purchase inspection report. However a civil engineer believed the house was in very sound condition.

There have been several different tenants living in the house since you purchased it. The previous owners were the first tenants.

You rent the property yourself. The relationships have always been strictly landlord/tenant.

You advertise on-line, have open houses and interview all potential tenants.

Rent is market value for the suburb.

The property has not been left vacant.

You have not used the property nor has it been used without rent charged.

Termite inspections brought to light a lot of water and dampness in the subfloor area. It was recommended by the termite inspections that the subfloor earth retaining wall be replaced.

A builder replaced the earth retaining wall with a treated pine retaining wall in the subfloor (underneath the house) and replaced the drain on the high side of the house.

You will also be installing more gutter downpipes when you have the money. The gutter does not take the roof water away effectively. You believe the gutters have been subjected to tampering.

You believe the tenants did not inform you when water started entering the subfloor as they don't go down under the house and they did not want an inspection. You made it very clear to them that they were not to store anything in the subfloor area due to the risk of termites. The house is in a known termite area.

You believe the drain issues on the high side of the house area are the direct consequence of gardening activities by the tenants.

The repairs were done by a builder.

You will not receive insurance or other monetary recovery.

The whole sub floor retaining wall was replaced.

The original was a fibro sheeting retaining wall.

Relevant legislation provisions:

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

Deduction for repairs

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) generally allows a deduction for expenditure incurred on repairs to premises or plant held or used by a taxpayer for the purpose of producing assessable income. However, capital expenditure is not deductible under section 25-10 of the ITAA 1997.

Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10 of ITAA 1997.

Taxation Ruling TR 97/23 states that in its context in section 25-10 of ITAA 1997, the word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

Expenditure incurred for repairs is not deductible under section 25-10 of the ITAA 1997 if the expenditure is of a capital nature. TR 97/23 states that expenditure for repairs to property is capital expenditure if the expenditure is for work that is a renewal in the sense of a reconstruction of the entirety.

The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' (Lindsay v FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201). In Lindsay's case, the taxpayer company was a slip proprietor and ship repairer. It claimed a deduction for the cost of reconstructing one of two slipways. In finding that the work was not repairs, Justice Kitto rejected the taxpayer's submission that either the whole slip (comprising the slipway, hauling machines, cradles and winches by which vessels were manoeuvred on to it) or the whole of the business premises containing the slipway should be regarded as the relevant entirety. His Honour decided that the slipway was an entirety by itself and not a subsidiary part of a larger whole.

Repair is distinct from improvement

Work done to restore the efficiency of function of the property or structure without changing its character is a repair. An improvement, on the other hand, provides a greater efficiency of function in the property, usually in some existing function. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.

To distinguish between a 'repair' and an 'improvement' to property, one needs to consider the effect that the work done on the property has on its efficiency of function. This is the determinative test.

Application to your circumstances

In your case, the replacement of a subfloor retaining wall is considered to be capital in nature and not a deductible repair under section 25-10 of ITAA 1997 because the whole retaining wall was replaced, making it a reconstruction of the entirety.

It is also an improvement because the material used in the replacement, treated pine, is termite proof, whereas the original material was not. In using treated pine you did not just restore the efficiency of function (the function of retaining earth), but also added an additional function of being termite proof. In so doing, you enhanced market value and extended the expected life of your property.

The installation of additional gutter down-pipes is also considered to be capital in nature and not a deductible repair under section 25-10 of ITAA 1997 because their installation will not restore the efficiency of function but add additional function by improving drainage and, in so doing, enhance the market value of the property. Hence it is considered to be an improvement and capital in nature.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).