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Edited version of your private ruling
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Ruling
Subject: Rental property expenses - repairs to sewerage system and tree removal
Questions and answers
Can you claim a deduction for the expenses relating to the removal of the tree at your rental property?
No.
Can you claim a deduction for all other expenses relating to the repair of the sewerage system at your rental property?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You are the sole owner of a rental property.
You were not aware of any problems with the sewerage or gas systems until mid-2011 when it was determined that a tree growing in the backyard had obstructed the main sewerage and gas pipes, causing blockages preventing waste from draining away, and also a gas leak.
The pre purchase inspection conducted in late 2009 did not indicate any problems with the sewerage or gas pipe work.
Works were undertaken to rectify the problem, including installing a dedicated boundary trap for the property, removing the tree that caused the problem, removing the back fence and decking in order to gain access to the pipes, and restoring the backyard.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 25-10.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the losses or outgoings are of a capital, private or domestic nature.
Section 25-10 of the ITAA 1997 allows a deduction for non-capital expenditure incurred on repairs to premises or plant held or used for the purpose of producing assessable income.
Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the circumstances in which expenditure incurred by a taxpayer on repairs is an allowable deduction under section 25-10 of the ITAA 1997.
Paragraph 13 of TR 97/23 provides a definition of the word 'repairs'. A repair means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.
A repair involves restoration of the efficiency of function of the property being repaired without changing its character. It may include the restoration of the property to its former appearance, form, state or condition. Work carried out can be described as a repair if done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes during the passage of time.
Maintenance includes the prevention of defects, damage or deterioration. Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property.
In your case, you incurred expenditure to remove the tree that was causing damage to the sewerage system at your rental property, and also undertook a series of other works in order to rectify the sewerage system.
Expenses relating to the removal of the tree
The tree was causing damage to your sewerage system at your rental property and would continue to cause damage if it was not removed. The removal of the tree did not actually repair any of the damage to the sewerage system, rather, its removal was to stop future damage occurring.
The expense of removing the tree is therefore capital in nature, as it is a one-off expense providing an enduring benefit of preventing any future damage to the sewerage system.
As the expense is capital in nature, you are not entitled to a deduction for the expense. You can, however, include the expense in your cost base for capital gains tax purposes.
Other expenses relating to the rectification of the sewerage system
The other expenses relating to the rectification of the sewerage system are repairs as these works were carried out to make good damage that had occurred.
Therefore, you are entitled to a deduction for these expenses.