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Edited version of private ruling
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Ruling
Subject: Rental property repairs
Question
Are you entitled to a repairs deduction for the expenses incurred to re-concrete the pool on your rental property?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You purchased a rental property approximately X years ago.
You rented out this property as soon as you took possession.
During recent floods the local council had to fix a sewage line that was located under a swimming pool on the rental property.
In order to fix the sewage line the council had to drain the pool.
Once the job was completed the swimming pool should have been refilled, however this was overlooked by the council workers.
As a result of there not being any water in the pool it is believed that subsequently parts of the pool have cracked.
Pool builders have advised that the only way to fix the pool is to completely concrete the pool again.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-10.
Reasons for decision
Summary
Your expenses for re-concreting the pool are not deductible as a repair as it is considered that you are replacing an entirety.
Detailed reasoning
Section 25-10 of the Income Tax Assessment Act (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.
The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co Pty Ltd v. FC of T (1965) 115 CLR 58) ATD 78; (1965) 9 AITR 710 it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.
Taxation Ruling 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.
Expenditure on a thing or structure that is a renewal, replacement or reconstruction of the entirety is an improvement rather than a deductible repair.
Paragraph 38 of TR 97/23 confirms that property is more likely to be an entirety if the thing or structure is an integral part, but only a part of the entire premises and is capable of providing a useful function without regard to any other part of the premises.
The swimming pool is a structure considered to be an integral part of the rental property and it is capable of providing a useful function without regard to any other part of the rental premises. Consequently installation, renewal or removal of a swimming pool would constitute an entirety and therefore the expense is of a capital nature.
In your case you will be incurring expenses in order to completely concrete the pool again. These works are considered to be replacing the swimming pool which is considered to be an entirety. The expenses incurred are therefore not deductible under section 25-10 of the ITAA 1997.
Note
You may be entitled to a deduction under the capital works deduction provisions under Division 43 of the ITAA 1997. More information can be found in our publication Rental properties 2010 which can be accessed through the Australian Taxation Office website at www.ato.gov.au