Edited version of private advice

Authorisation Number: 1052340016746

Date of advice: 5 December 2024

Ruling

Subject: Deductions - rental property expenses

Question 1

Can you claim a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the costs you incurred in relation to the stumping activities?

Answer

Yes.

Question 2

Can you claim a deduction under section 25-10 of the ITAA 1997 for the costs you incurred to replace the sewerage drain?

Answer

No.

Question 3

Are you eligible to claim a capital works deduction at a rate of 2.5% under Division 43 of the ITAA 1997, in relation to the costs you incurred to replace the sewerage drain?

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 purchased a property (the Property) more than a decade ago.

Just prior to you purchasing the Property it had been fully renovated by the previous owners, which included removing the timber stumps and restumping the house with galvanised steel stumps and cement caps.

The real estate agent acting for the owners at the time of purchase provided a building inspection report for your perusal and there was nothing to indicate there was an issue with the stumps.

You lived at the Property for a few years before you relocated to a new location due to employment reasons and the Property commenced being used for rental purposes. It has been used for rental purposes since this time.

House stump activities

You engaged the services of a person (Person A) to undertake general maintenance of the Property.

A significant number of years after the Property had commenced being used for rental purposes Person A advised you that some of the stumps had rust on the bottom above the cement cap. After they had undertaken further inspection of the stumps their advice was for you to engage the services of a builder who specialised in house stumping.

You engaged the services of Person B the owner of Company X to undertake an inspection of the house stumps.

Person B inspected the stumps and advised that some of the posts might need to be replaced given the condition of the posts, but that they were confident that the majority of stumps could be treated. The treatment process involved the removal of the cement cap, followed by the rust on the posts, with a rustproof coat being applied and a new cement cap being installed. Person B provided a quote for the costs to undertake the activities, indicating that they would not be able to commence work until late the following year.

You entered a contract with Company X to undertake the activities in relation to the stumps for a specified amount as provided in the quote, with an allowance for a variation depending on additional work being required.

The activities commenced and were completed in less than 20 days which involved several stumps being removed and replaced, with others receiving varying treatment as required, with the remainder of the stumps not having any activities undertaken on them.

You did not make any insurance claim in relation to the costs for the activities in relation to the stumps.

You paid the invoiced amount of Amount A as provided by Company X in several payments during the ruling period.

Sewerage drain activities

There had not been any issues or blockages to the sewerage line from when the Property was purchased until a significant number of years after the Property commenced being rented out when the tenants contacted the real estate agent (the Agent) to advise that the toilet was blocked.

The Agent organised for the sewerage drain to be inspected at your request.

Company A advised that the cause of the blockage was attributed to roots from the neighbour's trees and separation of the existing clay drainage pipes. It was indicated that the only way to fix the problem was to remove the trees that were causing the tree root issue, or to replace the existing clay sewerage line with PVC pipes due to the separation of the clay piping.

The removal of the neighbour's trees causing the tree root issue was not an option and you engaged the services of Company A to undertake activities in relation to the removal of the existing clay drainage pipes and replacing them with PVC piping.

The activities commenced and were completed in several days.

Company A issued an invoice for the activities with a total amount owing of Amount B.

You did not make any insurance claim in relation to the costs incurred in relation to the sewerage drainage activities and you will not be reimbursed for any of the costs by any other party.

You paid Amount B in two payments during the ruling period.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 subsection 25-10(3)

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 subsection 43-20(3)

Income Tax Assessment Act 1997 subsection 43-25(1)

Reasons for decision

Rental property deductions for repairs

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 does not allow a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction.

The term 'repair' 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.

However, replacement or substantial reconstruction of an entirety, as distinct from subsidiary parts of the whole, is a capital expense.

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. 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.

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 the income producing use of the property or to defects that emerge suddenly during that time.

Costs incurred in relation to initial repairs are not deductible under section 25-10 of the ITAA 1997. Activities undertaken to remedy some defect or damage to, or deterioration of, property will be an initial repair if the defect, damage or deterioration:

•         existed when the property was purchased; and

•         did not arise from the operations of the taxpayer who incurs the expenditure.

Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with 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.

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).

Paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered to be a subsidiary part rather than the entirety.

In the case of WG Thomas & Co Pty Ltd v FC of T (1965) 115 CLR 58; (1965) 14 ATD 78, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building.

Expenditure for work 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 or replacement in the sense of a reconstruction of the entirety.

A factory drainage system comprising of an underground system of concrete stormwater drains was considered to constitute an entirety in Case G5 (1995) 7 TBRD 29.

Subsection 25-10(3) of the ITAA 1997 excludes capital expenditure from being a repair deduction. However, a capital works deduction may be available for capital expenditure.

Capital works deduction

Where expenditure is not immediately deductible under section 25-10 of the ITAA 1997 because of its capital nature, the expenses may be deductible under Division 43 of the ITAA 1997.

Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements addresses a number of matters that are relevant in determining entitlement to, and the amount of, a deduction under Division 43 of the ITAA 1997 in respect of expenditure on the construction of assessable income producing buildings and other capital works. It also identifies certain expenses that are included in construction expenditure.

Paragraph 7 of TR 97/25 outlines the three categories of capital works in respect of section 43-20 of the ITAA 1997 as:

• Buildings or extensions, alterations, or improvements to buildings
• Structural improvements or extensions, alterations, or improvements to structural improvements; and
• Environment protection earthworks.

Examples of structural improvements are set out in subsection 43-20(3) of the ITAA 1997 which include, amongst other things, sealed roads, sealed driveways, pipelines, retaining walls and fences.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a rental property is 2.5% over a period of 40 years. A capital works deduction can only be made after the completion of the capital works.

Application to your situation

We have considered the nature of the activities that are the subject of this ruling to determine the taxation treatment of the costs you incurred in relation to those activities as follows:

House stump related activities

You purchased the Property more than a decade ago, having been renovated by the previous owner just prior to you acquiring the Property, which included restumping the house with galvanised steel stumps and cement caps.

The condition of some of the stumps had deteriorated over time with you having to replace some of them and undertaking work on some of the other stumps.

In accordance with the principles contained in Taxation Ruling TR 97/23 the activities undertaken in relation to the stumps constituted a repair for the following reasons:

•         New stumps had been installed just prior to you purchasing the Property. The issues with the stumps had arisen many years after you acquired the Property due to the environment where the Property is located over a period of time. The activities are not viewed as initial repairs.

•         The activities involved replacing some of the existing stumps due to deterioration from natural causes during the passage of time, with new stumps of the same material. Some other stumps required remediation work but not replacement. The activities undertaken in relation to the stumps merely restored the efficiency of function of the house and therefore are not considered to constitute an improvement to the house.

•         Not all of the stumps under the house required attention. The house is the entirety and the stumps are only a subsidiary part of the house; and

•         While some of the activities included an element of preventative maintenance work, that will not prevent the activities from being a repair.

Therefore, you can claim an immediate deduction under section 25-10 of the ITAA 1997 for the cost of the activities undertaken in relation to the Property's stumps.

Replacement of the sewerage drain

Many years after you purchased the Property, issues with the blockage of the sewerage drain had started to occur, which continued over a period of time.

There had been separating of the existing clay sewerage drainage pipe and blockages due to tree roots which had started to occur many years after you had purchased the Property. It is not viewed that the activities undertaken in relation to the removal and replacement of the sewerage drain is an initial repair.

However, in accordance with the principles contained in Taxation Ruling TR 97/23 the activities undertaken in relation to the removal and replacement of the sewerage drain does not constitute a repair. The sewerage drain is a separately identifiable capital item with its own function and is an entirety in itself. Therefore, the removal and replacement of the sewerage drainage was the replacement of an entirety which is a capital expense. Accordingly, you cannot claim a deduction for this cost under section 25-10 of the ITAA 1997.

However, you can claim a capital works deduction under Division 43 of the ITAA 1997 at the deduction rate of 2.5% of Amount B in the 20XX-XX income year, and each of the following 39 income years for a total of 40 years while the Property is genuinely available for rent.

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