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Ruling
Subject: Rental property expenses
Question and answer
Are you entitled to a deduction for expenses related to repairs to the retaining wall of your rental property?
Yes.
This ruling applies for the following periods:
30 June 2011
The scheme commenced on:
1 July 2010
Relevant facts and circumstances
You purchased a house several years ago. There was no evidence of defects to the retaining wall at the time of purchase.
The property has been used solely for income producing purposes.
Damage to the retaining wall became evident several years after you purchased it.
You engaged contractors to undertake the repairs.
Only part of the retaining wall required repairing. No improvements were made to the retaining wall and similar materials to the original were used.
Relevant legislative provisions:
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.
The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In (W Thomas & Co 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, 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.
In your case, you had owned the property for several years when you discovered the retaining wall required repairing. The works completed restored the retaining wall to its original condition using similar materials to the original.
As the essential character of retaining wall was not altered, the work is therefore considered to be a repair and not capital in nature and any expenditure incurred is deductible.