Edited version of your private ruling

Authorisation Number: 1012604239570

Ruling

Subject: Rental property - repairs - replace damaged sewage pipes with PVC pipes

Question

Are you entitled to a deduction for your share of the cost of replacing damaged sewage pipes in the year the costs were incurred?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You own a rental property jointly with your spouse.

The property has been available for rent since you purchased it more than 20 years ago.

You have had to have blockages cleared in the old earthenware sewage pipes on a number of occasions during your period of ownership.

Due to the inconvenience to tenants, and the cost and frequency of blockages, you are replacing the existing damaged earthenware pipes with new PVC pipes in accordance with current standards.

Relevant legislative provision

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

You can deduct expenditure you incur for repairs to premises used for income producing purposes providing the expenditure is not capital in nature (section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).

The word 'repair' is not defined within the income tax legislation. Accordingly, it takes its ordinary meaning. 'Repair' involves a restoration of a thing to a condition it formerly had without changing its character (W Thomas & Co v. FC of T (1965) 115 CLR 58).

Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred for repairs is deductible under section 25-10 of the ITAA 1997. Generally, works can be fairly described as 'repairs' if they are 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.

Expenditure for repairs to property is of a capital nature where the work is considered to be an initial repair, 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 a 'repair'.

As you have owned the property for an extended period of time and the need for repairs to the pipes was not evident at the time of purchase the repairs are not considered to be initial repairs.

An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' (Lindsay v. FC of T (1960) 106 CLR 377 at 385).

If expenditure is incurred in replacing or renewing a part of property and the work done restores a previous function of the property, or restores the efficiency of the previous function, it does not matter that a different material is used.

In your case, the replacement of the sewage pipes is considered to be the replacement of subsidiary parts of the building, not a replacement of an entirety. The works represent a repair to parts of the sewage system that had deteriorated by ordinary wear and tear during the passage of time. Also, the marginal enhancements that are introduced by bringing the property up to date in accord to current standards represent a replacement of something that was already there with its modern equivalent, rather than an improvement.

Accordingly, the costs incurred to replace the damaged sewage pipes are for a repair and are not capital in nature. You are entitled to claim a deduction for your share of the expenditure incurred under section 25-10 of the ITAA 1997.