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Edited version of your written advice
Authorisation Number: 1051218503917
Date of advice: 27 April 2017
Ruling
Subject: Rental property repair or improvement
Reasons for decision
Question 1
Are you able to claim a deduction for the replacement of stumps on your rental property, even though wooden stumps were replaced with concrete stumps under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period(s)
Year ending 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
You own a property (the Property) which is used to produce assessable income.
Whilst the Property was tenanted, the house has moved off its stumps.
The tenant demanded the situation be remedied immediately, which resulted in the house being re-stumped and re-balanced.
The original stumps were made from red gum wood, whilst the new stumps are made from concrete.
You were advised that concrete stumps are the modern equivalent of red gum stumps.
The cost of re-stumping and re-balancing the house was $XXX.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-10
Reasons for decision
Question 1
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 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.
In your circumstances, the house has needed to be re-stumped and re-balanced. You were advised that the old red gum stumps needed to be removed and new concrete stumps installed. The restumping does not constitute an improvement to the property as concrete stumps are considered the modern equivalent of timber stumps. The restumping is not considered a replacement of an entirety as the stumps form only a part of the property.
The restumping undertaken is considered a replacement to restore the efficiency of function of the property. Therefore, you are entitled to a deduction for the expenditure incurred to restump your rental property under section 25-10 of the ITAA 1997.