Edited version of private ruling

Authorisation Number: 1011484987410

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Ruling

1. Are you entitled to an immediate deduction for repairs to the driveway of your rental property?

No.

2. Are you entitled to a capital works deduction for repairs to the driveway of your rental property?

Yes.

3. Can you claim a deduction for lawyer fees?

No.

4. Can you claim a deduction for land title searches and copies?

No.

5. Can you claim a deduction for consulting a town planner?

No.

This ruling applies for the following period

1 July 2009 to 30 June 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased your investment property in 2003.

You incurred cost for capital works done by the city council to the driveway on your investment property.

The driveway was originally gravelled and the council replaced the driveway with bitumen.

At the time of the capital works the investment property was rented at arms length and currently still is.

You believed the road was a public road and took the council to court where you incurred lawyers' fees.

As part of your court action you incurred fees from consulting with a town planner.

You also incurred costs associated with undertaking relevant land title searches and making copies.

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 Section 43-110

Income Tax Assessment Act 1997 Subsection 43-20(3)(a)

Reasons for decision

Repairs

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for expenditure incurred for 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 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.

Paragraph 24 of the ruling explains that:

Expenditure on work that modifies property to satisfy regulatory requirements is allowable under section 25-10 as repair expenditure only if the work:

· remedies or makes good a defect in, damage to, or deterioration (in a mechanical or physical sense) of, property, and

· restores the efficiency of function of the property, and

· does not produce a new and different function for the property nor add to the property a function that it did not previously have.

However, the ruling also stipulates that:

The expenditure must not be of a capital nature, for example, an improvement.

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. 

Distinction between a repair and an improvement

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.

The issue of distinction between a repair and an improvement has been considered in many judicial and tribunal decisions.

One of the leading cases is Federal Commissioner of Taxation v. Western Suburbs Cinemas Ltd (1952) 86 CLR 102; (1952) 9 ATD 452; (1952) 5 AITR 300, where a cinema ceiling which was in a state of disrepair was replaced with a new ceiling of a different design and better material. It was held to be an improvement and not repairs, and that the cost of the ceiling was capital expenditure. The work did more than meet a need for restoration; it provided a ceiling having considerable advantages over the old one.

Some of the factors pointing to an improvement rather than a repair are whether:

· the modification work has effected an improvement to the asset

· there is greater efficiency of function of the property

· there is an increase in the value of the asset

· the expenditure reduces the likelihood of future repairs.

In your case the laying of bitumen at your rental property is to replace the current gravel surface. It is considered in your case that:

· the bitumen will provide a surface with considerable advantages over the old one

· different and better materials will be used

· the laying of bitumen will result in an improvement to the surface

· there is greater efficiency of function of the area

· there is an increase in the value of the surface

· the expenditure reduces the likelihood of future repairs.

The laying of the bitumen is therefore considered a capital improvement rather than a repair and as such is not deductible under section 25-10 of the ITAA 1997.

Capital works provisions

Section 43 of the ITAA 1997 allows a deduction for certain capital expenditure incurred in constructing capital works including buildings and structural improvements that are used for income producing purposes.

Subsection 43-20(3)(a) of the ITAA 1997 lists sealed driveways and sealed car parks as examples of structural improvement.

The laying of bitumen is considered to be a capital work for the purposes of section 43 of the ITAA 1997.

It should be noted that:

· the deduction is allowable only for the period the property is rented or is available for rent

· the deduction is not available until the construction is completed

· construction expenditure does not include expenditure on demolishing existing structures.

For your structural improvement the annual capital works deduction allowable is 2.5 per cent of the construction expenditure for a period of 40 years. Construction expenditure is the actual cost of constructing the capital works.

Legal expenses and fees

Some legal expenses incurred in producing your rental income are deductible. However; as your legal expenses were incurred because you were in dispute with the council over who should maintain the driveway and not incurred as part of producing assessable income you cannot claim them as a deduction.

Also, the fees from consulting a town planner, doing title searches and making copies can not be deducted because they were incurred as part of your dispute with the council and not incurred trying to produce assessable income.