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Ruling

Subject: Deduction-repairs

Question 1

Are you entitled to claim a deduction for the work undertaken to fixed part of the sewage system of your rental property?

Answer: Yes.

Question 2

Are you entitled to claim a deduction for the cost to relocate your tenants to temporary accommodation while the work was undertaken to your rental property?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts

You and your spouse purchased a property as joint tenants.

You did not have a pre-inspection report undertaken of the property.

The sewer and drainage systems for the property functioned normally when you purchased the property.

The property has been available for rent since it was purchased.

You were informed by the tenants that water was overflowing out of the waste pipes in the property.

You engaged a plumber to inspect the waste water pipes.

The plumber advised that the sewer pipes had a blockage as a result of tree roots intruding into the existing clay sewage pipes.

The clay sewage pipes were replaced with PVC piping and no modification was made to the sewage system.

The following work was undertaken to the property:

§ to remove tree and roots system

§ replace part of the damaged sewage system

§ to replace damaged lawn as a result of work undertaken to replace part of the damaged sewer system

You paid accommodation expenses for relocating the tenants while the work was undertaken.

You and spouse will not receive any payments from your insurer in regards to the work undertaken to replace part of the sewer system.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10.

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

Reasons for decision

Section 25-10 of the Income Tax Assessment Act 1997 (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 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.

A repair involves a restoration of a thing to a condition it formerly had without changing its character. What is significant is the restoration of efficiency in function rather than the exact repetition of form and substance. Repair involves restoration by replacement or renewal of a worn-out or dilapidated part of something but not reconstruction of the whole thing, that is the entirety.

Determining what is the entirety is a question of fact in each case and often causes difficulty. In a case involving 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, etc, was a repair to the building (W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710). On the other hand, in a case involving the demolition and reconstruction of a slipway, the slipway was held to be an entirety in itself (Lindsay v. Federal Commissioner of Taxation (1960) 106 CLR 377; 12 ATD 197).

However, substantial improvements, additions, alterations, modernisations are not repairs. 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; and the expenditure reduces the likelihood of future repairs.

If an asset was in disrepair at the time of its acquisition, the cost of initial repairs to remedy those defects is of a capital nature and non-deductible because it would have be taken into account in the purchase price.

Application of the above to your situation

Broken pipes

Your rental property was available for rent from the date of purchase. The sewage system of the property was in good condition as there were no previous problems with the sewerage system or overflowing from the waste water pipes. The sewer and drainage systems for the property were functioning normally when you purchased the property. The damage to part of the sewer pipes arose as a result of the tree roots intruding into the clay pipes.

The sewerage and drainage systems would include water from the sinks and baths and the waste water from the cistern and the toilet bowl. The clay pipes are not capable of providing a useful function without regard to the rest of the drainage system of the property. The replacement of the broken clay pipes does not constitute the replacement of an entirety.

It is accepted that the use of PVC pipes to replace the broken clay piping of part of the sewer system constitutes a repair as the change in material did not improve the efficiency or function of the sewer system.

The work undertaken on part of the sewer system indicates the sewer system has merely been repaired by its modern equivalent and restored the original function.

It is considered that the cost to replace the broken pipes of the property's sewer system is deductible under section 25-10 of the ITAA 1997 as the sewer system was restored to it original condition.

The removal of the trees and the replacement of the damaged part of the lawn are also allowable deductions as part of the repair to rectify the damage to the property's sewer system.

Accommodation expense

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. 

Expenses that are 'incidental and relevant' to the taxpayer's income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction under section 8-1 of the ITAA 1997 (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).

Therefore, providing the expense can be objectively viewed as a necessary or natural consequence of the taxpayer's income earning activities, the expense will be 'incidental and relevant' to the income earning activities of the taxpayer.

In your case as a landlord, it is expected that you are to provide premises which are fit for occupation. However due to the extent and nature of the work you had to relocate your tenants so that work to the property could be undertaken and as a result incurred a cost to relocate your tenants to temporary accommodation.

In these circumstances your expenditure can be viewed as a natural consequence of your income earning activities as a landlord and therefore 'incidental and relevant' to the derivation of rental income.

Accordingly, you are entitled to a deduction for the expenditure incurred to relocate your tenants to short term accommodation under section 8-1 of the ITAA 1997.