Edited version of your written advice

Authorisation Number: 1051178528409

Date of advice: 6 January 2017

Ruling

Subject: Rental property repairs

Question and answer

1. Is the cost of resecuring top timber on a retaining wall located on your rental property an allowable deduction as a repair?

Yes.

2. Is the cost of replacing an open cut drain with a concrete drain an allowable deduction as a repair?

No

3. Is the cost of spraying concrete on earthworks an allowable deduction as a repair?

No

This ruling applies for the following periods

Year ending 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling

You have made a partial repair to a retaining wall

You resecured the top tiers of your retaining wall.

Due to the spoon drain being worn out and dilapidated, you cleared and replaced it with a spoon drain of a different material.

The crumbling open cut earthwork was stabilised by spraying it with a coating.

This was to stop further crumbling of the dirt earthworks.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

Distinction between a repair and an improvement

In some cases, it is difficult to establish whether an expense incurred with respect to a rental property should be classified as a repair, deductible immediately under section 25-10 of the ITAA 1997, or as an improvement, deductible over a period of time in accordance with the section 43-10 of the ITAA 1997.

Taxation Ruling TR 97/23 discusses the Commissioners view on the distinction between what constitutes a repair and what constitutes an improvement based on a variety of indicators. 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.

The issue of distinction between a repair and an improvement has been considered in many judicial and tribunal decisions. One of the leading cases is FC of T v. Western Suburbs Cinemas Ltd (1952) 86 CLR 102; 9 ATD 452, where a cinema ceiling which was in a state of disrepair was replaced with a new ceiling of a different design and better material. It was held to be an improvement and not a repair, and that the cost of the ceiling was capital expenditure. The works did much more than meet a need for restoration; it provided a ceiling having considerable advantages over the old one.

Some of the factors which are indicative of an improvement rather than a repair are as follows:

● the modification work has effected an improvement to the asset;

● there is greater efficiency of function of the property;

● there is an increase in the value of the asset; or

● the expenditure reduces the likelihood of future repairs.

Furthermore, replacement or substantial reconstruction of the entirety, as distinct from the subsidiary parts of the whole, is an improvement. 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.

Paragraph 40 of TR 97/23 provides examples of property that constitute an entirety and states that:

Something that is part of a building, for example, a roof or wall, is just that and no more. The building itself is the entirety.

In Lindsay v. Federal Commissioner of Taxation (1961) 106 C.L.R. 377, the High Court took the view that what was carried out was the construction of a very substantial erection, such that it constituted a renewal, rather than a repair in the sense spoken of by Buckley L.J. in Lurcott v. Wakely and Wheeler (1911 1 K.B. 905 at p. 924 when he said:

Repair is restoration by renewal or replacement of subsidiary parts of the whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject matter under discussion. 

TR 97/23 also states it is a question of fact and degree whether the work is the reconstruction of an entirety or a progressive restoration of subsidiary parts of the entirety over a period of time (paragraph 43). Relevant considerations in drawing the line of demarcation here include: 

● the nature, scale and dimensions of the work in proportion to the nature, scale and dimensions of the property involved (the larger the work in comparison with the scale and dimensions of the property, the more likely a reconstruction of the entirety is involved);

● the period of time over which the work is done (the shorter the period, the more likely a reconstruction of the entirety is involved); and

● whether the work is done in accordance with an on-going program of restoration (more likely to constitute deductible repairs) or done in one operation (more likely to constitute non-deductible repairs).

Retaining wall

The original material on the retaining wall was resecured. As you have reused the original material and made them secure not replaced or improved the wall, this has simply restored the efficiency of function of the retaining wall, therefore the cost is a repair deduction.

Spoon Drain

You have not replaced anything. You have upgraded a dirt trench with a trench of another material. These works do much more than meet a need for restoration, the new spoon drain has considerable advantages over the old dirt drain. It is a capital improvement. Therefore it is not a repair and no deduction is allowable.

Earthworks

You have coated the earthworks as the earth was unstable and fell into the drain. There was no coating on the earthworks before, you have not replaced an existing coating with something equivalent you have added a new coating as the existing earthworks were not stable. This is an improvement that goes beyond a repair. It is adding something new and different to increase the efficiency of the wall, it is a capital improvement. Therefore no deduction is allowable.