Edited version of your written advice

Authorisation Number: 1012822417929

Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction as a repair for expenses incurred in restumping and levelling, and associated repairs, undertaken to your rental property?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You purchased a residential property 20XX. The property was initially your main residence. You obtained a building report at that time which did not show any major structural issues with the property.

The property was tenanted several years later.

It was subsequently reported that the water main adjacent to the property was leaking. This was discovered to have caused structural issues to the dwelling including subsidence. A builder was engaged to level and restump the property and perform associated works. The builder advised that due to the scope of the works the tenants would be required to vacate, which they did.

It was then discovered the roof needed repairing. An insurance claim was made for this work; however some associated repair work was not included within this claim.

Associated and additional work with the restumping was then performed. The property then sold without being re-tenanted.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

Section 25-10 of the Income Tax Assessment Act (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. FC of T (1965) 115 CLR 58, 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. 

Case V2 88 ATC 107; AAT Case 4012 (1988); 19 ATR 3038 concerned partial underpinning of a rental property caused by excessive drying of the subsoil. It was found that the foundations were restored to their former efficiency in function without the essential character of the foundations being altered. The repairs to the foundations were not capital in nature, as they did not change the nature and character of the building and as such were deductible as repairs. 

In your case, you have owned the property for several years, and it was tenanted at the time the repairs commenced. The need for repairs was occasioned by factors which occurred during the period of income production, and the property only became untenanted due to the scope of the work to be performed. The levelling and restumping of the property and the associated repairs were merely to restore the efficiency of function of the property. As the essential character of the property was not altered, the work is therefore considered to be a repair and not capital in nature and any expenditure incurred is deductible.

The fact that the property was sold after the work was completed is not relevant as the repairs relate to a period when the property was income producing.