Edited version of private advice

Authorisation Number: 1052387675652

Date of advice: 17 April 2025

Ruling

Subject: Rental property deductions

Question

Is the sum the Taxpayer paid in respect of works carried out to the carport of the Taxpayer's rental property deductible under section 25-10 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

XX XX XXXX

Relevant facts and circumstances

The Taxpayer owns a rental property ('the Property').

The Taxpayer first leased out the Property on XX XX XXXX.

On XX XX XXXX, an inspection was conducted on the property to examine the apparent movement of the footing system of the carport structure.

On XX XX XXXX, Company 1 sent the Taxpayer a site investigation report for the Property.

The report explained in detail the characteristics of the soil upon which the carport structure stood. The condition of the soil meant that the carport structure was susceptible to movement from the bottom.

On XX XX XXXX, Company 1 sent the Taxpayer an underpinning investigation and design report regarding the condition of the carport.

The report contained details about the movement of the footing system of the carport structure. The report confirmed a pattern of movement of the structure's footing system, and a risk of further movement.

The report confirmed that, due to the state of the structure's footing system, it required underpinning works to prevent cracking and rotation in the external walls of the carport, thereby preventing any risk of further damage or deterioration.

Additionally, the report noted that it is difficult to determine how much or if any additional movement will continue, especially considering the Property's susceptibility to extreme weather conditions due to its location in XXX.

The report explicitly expressed that rectification work in the form of underpinning was recommended to help stabilise the footing system of the carport.

On XX XX XXXX, the Taxpayer received a quotation of $XX,XXX for the underpinning works on the Property. The quotation was provided by Company 2 ('the contractor'). The quotation focused on the proposed installation of underpinning pads for the carport's long-term stability, as opposed to the replacement of the carport structure in its entirety.

The Taxpayer accepted the quotation and went through with the project with the aim of installing piers to restore the stability and structure of the existing carport. In line with the works specified in the quotation, the following took place on the property in XXXX:

•   removal and replacement of concrete for underpinning purposes

•   construction of piers to support the carport structure

•   removal of surplus soil from the site

•   termite treatment

•   cleaning the site.

These works aimed to restore the structure to its initial position and ensure its stability.

The Taxpayer was charged a total amount of $XX,XXX for the works on the Property.

Reasons for decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income. There are exceptions where the costs are of a capital, private or domestic nature.

Section 25-10 of the ITAA 1997 allows deductions for expenditure incurred by the Taxpayer for repairs to premises or part of premises held by the Taxpayer solely for the purposes of producing assessable income.

Paragraph 13 of TR 97/23 Income tax: deductions for repairs states that the word 'repairs' follows its ordinary meaning. This means that a repair can refer to the act of remedying or making good defects in, damage to, or deterioration of, a property with the intention of maintaining the condition of the property for its continued existence.

According to Paragraph 21, a repair for the purposes of section 25-10 is a question of fact and degree with regard to the appearance, form, state and condition of the property at the time the expense is incurred. The nature and extent of the work done to the property is relevant.

Paragraph 22 states that work which goes beyond the meaning of 'repairs' is not deductible. This includes works that change the character of the property or works that do more than restore the property's efficiency of function.

Paragraph 44 states that a repair does not change the character of the property, as opposed to an improvement which does. As outlined in paragraph 45, the test is a determinative one.

Therefore, we need to consider the specific type of works that were undertaken.

Paragraph 46 states that it is possible that the replacement of a subsidiary part of the property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property.

Replacement or substantial reconstruction of an entirety is not a repair.

The High Court of Australia (Windeyer J) said in W Thomas & Co Pty Ltd v FC of T (1965) 115 CLR 58 at 72:

Repair involves a restoration of a thing to a condition it formerly had without changing its character. But in the case of a thing considered from the point of view of its use as distinct from its appearance, it is restoration of efficiency of function rather than exact repetition of form or material that is significant.

In the case of BP Oil Refinery (Bulwer Island) Ltd v FCT(1992) 23 ATR 65, the wooden piles of a wharf were encased in concrete to prevent further deterioration by marine organisms. It was held that the work was an improvement rather than a repair because something was added: both the substance in which the piles were encased and the capacity of the piles to avoid deterioration.

Whether work constitutes the replacement of a whole item or just a part of an item is a question of fact and degree. In the case of Rhodesia Railways Ltd v Income Tax Collector (Bechuanaland) [1933] AC 362, it was found that the replacement of a subsidiary part or a part of a whole was deductable, being the replacement of rails and sleepers over 53 kilometres of a 630-kilometre railway line.

Underpinning works

The Property is used for the purposes of gaining rental income. The underpinning works on the Property were undertaken for the purpose of restoring the carport structure to its original form, and to prevent further deterioration.

The foundations of the carport structure needed to be strengthened after the structure was found to be shifting due to the condition of the soil. Any further movement would have placed the carport structure at risk of further cracking and rotation of the external walls.

The carport is a permanent fixture forming part of the Property which is leased out for income producing purposes. The piers that were installed to support the foundations of the carport did not change the nature or the character of the structure as a whole. They simply help to maintain the stability and original intended purpose of the carport to securely house the vehicles that were parked under its roof.

Furthermore, the underpinning works are not an improvement to the Property as they merely aim to undo the deterioration and restore the carport to its previous condition. They do not change the inherent character of the structure.

Therefore, the Taxpayer can claim a deduction for the underpinning works done to the carport structure of the Property.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).