Edited version of your written advice

Authorisation Number: 1051489661402

Date of advice: 05 March 2019

Ruling

Subject: Rental property deductions

Question

Can you claim an immediate deduction for the work done to the sewage pipes of your rental property?

Answer

No

This ruling applies for the following period

Year ended 30 June 2017

The scheme commenced on

1 July 2016

Relevant facts

You purchased a property as a residential rental property.

The property was made available for rent immediately on settlement.

Approximately three months after purchase the property was found to have issues with the plumbing which was not known to you prior to purchase and it was found that tree roots were blocking the pipes.

Work was carried out to excavate the sewer pipes, remove the tree roots and repair the damage.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

Question

Summary

A deduction is allowed for the cost of repairs to premises used for income producing purposes; however where the condition was in existence at the time of purchase, the expense is considered to be capital in nature.

Detailed reasoning

Section 25-10 of the 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 denies a deduction for repairs where the expenditure is of a capital nature.

The meaning of repairs

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a 'repair' involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.

Initial repair

Paragraph 59 of TR 97/23 states that expenditure incurred on an initial repair after a rental property is acquired, where the expenses are incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. This is so whether the property is purchased or obtained under lease or licence by the taxpayer.

The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred: but see paragraphs 63 to 66 of this Ruling in relation to dissecting or apportioning initial repair costs.

These expenses remain capital in nature even when some income is produced by the property prior to the initial repairs being incurred.

Paragraphs 60 and 61 of TR 97/23 state that the main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Where expenditure remedies damage, defects or deterioration to the property which existed at the time of purchase of the property and did not arise from the income producing activity, the expenditure is capital in nature.

It is not considered material whether you were aware of the condition or the need for repair of the property at the time of purchase. Expenditure on initial repairs lacks a connection to the income producing activities of the property and is considered an additional cost of acquiring the property or an improvement in the quality of the property you acquired.

In your case we have determined that you cannot claim deductions under section 25-10 of the ITAA 1997 for the cost of the works to your sewage pipes.

Approximately 3 months after purchase you had to rectify the problems with the plumbing.

The expenses are repairs to remedy an existing defect in the capital asset. You are not restoring the functional efficiency of an income producing asset where the damage or defect was caused by its income producing use.

Although an immediate deduction is not available for the full cost of the work to the sewage pipes, a capital works deduction is allowed at the rate of 2.5% each income year while the property is used for income producing purposes.

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