Edited version of your written advice

Authorisation Number: 1012691190184

Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a repairs deduction for your share of the following costs incurred on your rental property:

• relaying paving and

• letterbox replacement?

Answer

Yes.

Question 2

Are you entitled to a repairs deduction for the other work carried out on your rental property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• the application for private ruling received including a break up of costs incurred.

You have a rental property which has been rented since purchase a few years ago.

You are a joint owner of the property.

In 20XX, you began significant work in relation to the yard of the rental property in order to repair paving and other areas which had deteriorated and been damaged due to flooding and subsequent erosion to the property.

Your real estate agent highlighted to you the potential for legal action should injury be sustained by a tenant if the property were to remain in its then current condition.

Over several years you had attempted to rectify the issue without success.

You have had a retaining wall erected to prevent future flooding and erosion from damaging the property. Previously there was no retaining wall or drainage grate and these were added to prevent future damage to the property. The retaining wall was not added for aesthetic purposes.

Work carried out in relation to the retaining wall includes:

• drawings

• insurance and administration

• demolition

• levelling

• steel retaining

• drainage gravel

• paving relaying

• drainage grate

• retaining wall construction

• letterbox replacement

The drainage grate was installed at the bottom of the retaining wall.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Repairs

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, to the extent that the expenditure is not capital in nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

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. 

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

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.

It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, 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.

Retaining wall

In your case, the property was damaged due to flooding and erosion. As a result you had a retaining wall constructed to help prevent future damage. A retaining wall was not previously present on the property. As highlighted above, a repair replaces a part of something or corrects something that is already there. As the retaining wall was not previously there, it cannot be said that the work was a repair. Rather the construction of a new retaining wall is regarded as an improvement and therefore capital in nature. Furthermore the retaining wall is considered to be a separately identifiable capital item with its own function and therefore regarded as an entirety.

It is acknowledged that a repair will have a certain amount of improvement however the addition of a retaining wall is more than a minor improvement. The new retaining wall provides a greater efficiency in the property's ability to cope with flooding and erosion and reduces the likelihood of future damage. The work done is more than just restoring what was there. The retaining wall provides significant advantages to the property and offers a more desirable condition. Such work is regarded as an improvement and therefore capital in nature.

As the costs of construction a new retaining wall on your rental property is capital in nature, the associated expenses in relation to the retaining wall including the costs of drawings, insurance, administration, levelling, steel retaining, drainage gravel, drainage grate are not deductible as repairs. However a capital works deduction is allowed under Division 43 of the ITAA 1997.

Paving relaying and letterbox replacement

The relaying of the paving and letterbox replacement are considered to be deductible repairs. That is, this work is not regarded as capital in nature and is regarded as normal maintenance expenditure. Therefore a deduction is allowable under section 25-10 of the ITAA 1997.

Apportionment of expenses

As you are a joint owner of the property, only the relevant portion in relation to your share of ownership in the property is an allowable deduction.