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Edited version of your written advice
Authorisation Number: 1051213375995
Date of Advice: 11 April 2017
Ruling
Subject: Rental property - repairs
Question 1
Are the works carried out to replace a failed retaining wall at a rental property owned by the applicant a repair?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You own the Property.
The Property is rented out to produce assessable income.
The retaining wall located on the Property had deteriorated over time and a section of it collapsed.
You contacted a consultant engineering firm to assess the failed section, as well as the remaining whole sections of the retaining wall.
Their findings were that the whole retaining wall should be replaced to prevent further damage.
The retaining wall was replaced as per the consultant engineer's recommendations in the 20XX income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10
Detailed reasoning
Repairs
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, to the extent that the expenditure is not capital in nature.
Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.
TR 97/23 indicates 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, or
The works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or the work is an initial repair.
Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.
TR 97/23 states that with a repair, 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. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.
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. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.
In your circumstances, the old retaining wall failed as a result of poor drainage and a build-up of water in the soil. Upon inspection by a consultant engineering firm, it was their recommendation that the entire wall be replaced to remedy defects in the original construction and to prevent further damage. The new retaining wall has no greater efficiency of function, was already in a state of disrepair and has been completed to now bring it into line with Australian standards and building codes. We consider that any gain through different materials being used in the construction of the new retaining wall is a minor and incidental improvement and does not affect the overall efficiency of the wall.
Therefore the works carried out at the Property are a repair.
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