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Ruling

Subject: Rental property expenses

Question 1:

Are you entitled to an immediate deduction for the work done to the retaining wall?

Answer:

No

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You purchased a residential rental property over three years ago.

A retaining wall on the property has failed.

You obtained a structural engineers report over 12 months ago which noted that a pre-purchase inspection showed sheds leaning toward the wall, but no further investigation was carried out.

This engineers report in also noticed a similar lean and proposed two options for remedial works:

Leave the existing wall in place and stabilise the backfill behind the wall.

Remove and re-instate the existing wall.

You chose the first option.

You have recently found a photograph which was taken of the sheds as they were during final handover of the property when it was purchased by you. This photograph shows that the sheds were leaning in a similar way then to the way they are leaning now.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Division 43.

Reasons for decision

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.

The word 'repair' is not defined within the tax legislation. Accordingly, it takes its ordinary meaning. The courts have 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. (W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710).

Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred for repairs is an allowable deduction.

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 work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or

· the work is an initial repair. 

In your case, it is relevant to consider whether the work carried out is an initial repair.

Paragraph 59 of TR 97/23 states that expenditure is incurred on an initial repair after the property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not therefore deductible under section 25-10 of the ITAA 1997. TR 97/23 further states that the cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred.

In your case, when you acquired the property the deterioration of the retaining wall was already present.

The work was carried out to the retaining wall some time after your purchase of the property, and so you had derived some income before the work was carried out, however, the work done was not occasioned by factors that occurred during your period of income production, that is, the deterioration of the retaining wall arose before your income producing use of the property.

Therefore as the need for the work existed when you acquired the property, the associated expenses do not relate to your assessable income producing use of the property. Furthermore they are regarded as initial repairs and are therefore capital in nature. Repairs that are capital in nature are not deductible under 25-10 of the ITAA 1997.