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Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for repairs to the front boundary fence of your rental property?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2011

The scheme commences on

1 July 2010

Relevant facts and circumstances

You purchased your rental property some years ago.

You received a 'Show cause notice' from the local council advising that the front boundary fence was in a dilapidated condition in that it had a large crack and posed a danger to pedestrians.

At the time of purchase the front boundary fence was in good condition.

On inspecting your rental property you established the fence had a large crack and was leaning towards the footpath.

You arranged for a building company to replace the damaged section of the boundary fence.

You have provided a copy of the builder's quote.

You state the work undertaken to the boundary fence was only to restore the efficiency of the function of the fence to its original condition and did not change its character.

You have provided a diagram identifying the section of the boundary fence repaired.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

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.

The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 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,

§ the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair'.

Replacement of a subsidiary part or an entirety

 TR 97/23 at paragraph 38 considers that a property is more likely to be an entirety if:

§ the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises;

According to paragraph 39 of the TR 97/23, property is more likely to be a subsidiary part rather than an entirety if:

§ it is an integral part of some larger item of plant;

§ the property is physically, commercially and functionally an inseparable part of something else.

In the case of W Thomas & Co Pty Ltd v. FC of T (1965) 14 ATD 78; (1965) 115 CLR 58, 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.

Repair or 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.

Paragraph 16 of TR 97/23 states that to repair property, improves to some extent the condition it was in immediately before the 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.

In your case, you were required to replace the damaged fence which was part of the entire boundary fence. The whole boundary fence is considered to be the entirety and the repaired section of the fence is considered to be a subsidiary part of the whole fence.

The work done was to restore the front fence to its original condition prior to being damaged. The fence has been replaced with similar materials and has not changed its character and functionality nor does it represent a renewal or reconstruction of the entirety.

Therefore, you are entitled to a deduction for replacing the front boundary fence under section 25-10 of the ITAA 1997.