Edited version of your written advice

Authorisation Number: 1012828428762

Date of advice: 25 June 2015

Ruling

Subject: Rental property

Question

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

• Side fence replaced

• Replace rotting weatherboard on outside wall

• Fix rotting stairs and side gate and

• Tree removal?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You and your spouse own an investment property which you purchased several years ago. Your ownership interest is 50%.

The property has deteriorated due to age and weathering on the outside since purchase.

You had to replace the back stairs as they were rotting and dangerous for the tenants. The tenants had complained to the Real Estate agent on several occasions. You replaced the hardwood steps with hardwood steps and supports.

Also the rotting weatherboard had to be replaced at the side of the house.

The side paling fence was falling over and rotting and needed to be replaced. It was replaced with a paling fence.

You also removed a tree as it was dangerous and near the next door neighbour's property. Branches were falling off and the tree was overhanging the neighbour's roof and affecting water pipes. Some parts of the tree were rotting. Gutters in both houses were full with tree debris. The whole tree was removed after council inspected and approved the removal.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 8-1

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. A repair restores the efficiency of function of the property without changing its character.

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.

You have incurred expenses for replacing the back stairs, replacing the side weatherboard and replacing the side fence on your rental property.

The above items are part of the building and are not regarded as a renewal of the entirety. Similar materials were used in the work. The replacement of the above items is not regarded as an improvement.

According to paragraph 125 of the TR 97/23, a repair after acquisition of property is an 'initial repair' if the repair was due when the property was acquired, in the sense that there was a need for repair to restore or maintain the property's efficiency of function. In other words, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended.

It is accepted that the defects emerged during the income producing use of the property after purchase. The replacement of the above items is not regarded as an initial repair. Therefore the work is not considered to be capital in nature and you are entitled to a deduction for the associated repairs under section 25-10 of the ITAA 1997.

Tree removal

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

General garden maintenance is an allowable deduction under section 8-1 of the ITAA 1997 where, for example, you pay a tradesman to mow lawns, maintain garden beds or prune trees. However, landscaping is considered to be an improvement and capital in nature and therefore not an allowable deduction.

In your case, you incurred expenses to remove a tree which was blocking gutters and affecting water pipes. The removal of the tree does no more than return the property to the state it was in before the problem arose.

The cost of the removal of the tree is not an improvement or capital in nature and is therefore deductible under section 8-1 of the ITAA 1997.