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Edited version of your written advice
Authorisation Number: 1012696184626
Ruling
Subject: Rental repairs
Question 1
Are expenses incurred in building a retaining wall for storm water deductible as a repair under section 25-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
Question 2
Are expenses incurred in building a retaining wall for storm water deductible as a capital works deductions under section 43-10 of the ITAA 1997?
Answer
Yes
Question 3
Are expenses you incurred in relation to garden maintenance deductible under section 8-1 of the ITAA 1997?
Answer
Yes
This ruling applies for the following period(s)
Income year ended 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
You have a property you rent out.
There was a flood and suffered damage to your property.
You constructed a retaining wall to improve the drainage and reduce the long term maintenance of the property.
You were not aware of the susceptibility of the property to flooding prior to purchasing the rental property.
You also incurred expenses in relation to garden maintenance. These expenses were incurred by you and not the tenant.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 25-10
Income Tax Assessment Act 1997 section 43-10
Income Tax Assessment Act 1997 section 43-150
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic in nature, or relate to the earning of exempt income.
Accordingly, to be able to claim expenses that relate to the property you must have held the property for the purpose of gaining or producing assessable income, and those expenses must not be of a private or domestic nature.
Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.
Section 25-10 of the 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 97/23 provides the Commissioner's view on the different between a repairs and improvements. At paragraph at 44:
The meaning of 'repair' or 'repairs' is considered in paragraphs 12 to 30 of this Ruling. In the case of a 'repair', broadly speaking, the work restores the efficiency of function of the property without changing its character. 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.
In your circumstances as there was no retaining wall on the property prior to the current construction, therefore it is considered that the retaining will be a capital improvement to the property. The retaining wall will result in an improvement of the efficiency or function of the property. The fact that you were unaware of the property's susceptibility to flooding is irrelevant to determining whether the expense is capital or revenue in nature. Consequently the expense relating to the retaining wall will only be deductible as a capital works deduction at the rate 2.5% over 40 years under section 43-10 of the ITAA 1997.
It is accepted that any garden maintenance expenses incurred by you and not the tenant are deductible under section 8-1 of the ITAA 1997.
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