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Edited version of your written advice
Authorisation Number: 1012894319083
Date of advice: 13 October 2015
Ruling
Subject: Rental property repairs
Question
Are you entitled to claim a deduction for the cost of underpinning part of the footings of 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 have owned a rental property for a number of years.
Due to a complaint from a tenant about the property, you engaged professional underpinners to provide a report.
Some of the foundations of the property required underpinning.
You are not expecting any insurance or monetary recovery.
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 Pty Ltd 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.
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 bought the property a number of years ago and the property has been income- producing. The need for repairs was occasioned by factors that occurred during the period of income production. Although the work required was extensive, only part of the foundation was underpinned, that restored it to its original condition. As the essential character of the foundations was not altered, the work is considered to be a repair and not capital in nature, and consequently the expenditure incurred is deductible as per section 25-10 of the ITAA 1997.