Edited version of private advice

Authorisation Number: 1051846195058

Date of advice: 3 June 2021

Ruling

Subject: Rental deductions

Question 1

Is the expenditure to demolish the pool and filling in the resulting hole immediately deductible as a repair?

Answer

No.

Question 2

If the answer to Question 1 is no, is the amount included in the cost base of the property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your spouse purchased a property post CGT.

You and your spouse lived in the property until XXXX.

You and your spouse commenced renting the property out in XXXX.

The property had a fibre glass swimming pool.

The pool was already installed when you and your spouse purchased the property in the early 2000's.

The pool developed fibre glass cancer and started to deteriorate.

The pool started to leak.

It was going to cost a significant amount of money to repair the pool.

A decision was made to demolish the pool and back fill and turf over the top.

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 108-60

Income Tax Assessment Act 1997 section 108-70

Income Tax Assessment Act 1997 section 110-25

Reasons for decision

An expense is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) if and to the extent to which it is incurred in gaining or producing your assessable income or in carrying on a business for that purpose. However, you cannot claim a deduction for an expense that is of a capital, private or domestic nature.

A deduction is only allowable if an expense:

•         is actually incurred

•         meets the deductibility tests

•         satisfies the substantiation rules.

Repairs

Section 25-10 of the 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.

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.

TR 97/23 states that in its context in section 25-10, 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 if the expenditure is of a capital nature. TR 97/23 states that expenditure for repairs to property is capital expenditure if the expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety.

In this case the pool was not repaired as a decision was made not to repair the pool due to the significant costs associated with a repair. You decided to remove the pool and back fill it and turf over it.

This is a capital expenditure and not a repair. You were not restoring the pool to its previous efficiency. You were removing it entirely.

This expense is therefore not deductible.

Cost base

Subsection 110-25(5) of the ITAA 1997 provides that the fourth element of the cost base of a CGT asset is that capital expenditure incurred to increase the asset's value.

Expenditure incurred for capital improvements to post-CGT land will not be included in the cost base of the land if the capital improvement is considered to be a separate CGT asset. As neither of subsection 108-70(1) or section 108-60 of the ITAA 1997 apply in relation to the swimming pool it is not a separate asset for CGT purposes.

For expenditure to be included in the fourth element of the cost base of an asset under subsection 110-25(5) of the ITAA 1997, it must be incurred 'to' enhance the value of the asset, that is, for the purpose of enhancing the value of an asset. It is immaterial whether or not the expenditure in fact enhances the value of the asset.

The expenses associated with the filling in of the swimming pool are a capital expense and can form part of the fourth element when calculating the cost base of the property.

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