Edited version of private advice

Authorisation Number: 1051612767586

Date of advice: 27 November 2019

Ruling

Subject: Rental property works

Question 1

Are the out of pocket expenses you incurred for the repair of the external staircase considered a deductible repair?

Answer

Yes. It is accepted that all expenses incurred in relation to the repair of the external staircase are a deductible repair associated with water damage that occurred while the property was used to produce assessable income and deductible as per section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Are the out of pocket expenses you incurred for repair of storm water drains considered a deductible repair?

Answer

Yes. It is accepted that all expenses incurred in relation to the storm water drains are a deductible repair associated with water damage that occurred while the property was used to produce assessable income and deductibleas per section 25-10of the ITAA 1997.

Question 3

Are the out of pocket expenses you incurred for the re-levelling of the property considered a deductible repair?

Answer

Yes. It is accepted that the re-levelling works used similar material to what was previously there. The property is restored to its original condition, function and appearance. The work is not regarded as an improvement. The re-levelling expenses incurred are a deductible repair under section 25-10 of the ITAA 1997.

Question 4

Are the out of pocket expenses you incurred for small maintenance repairs to the property considered a deductible repair?

Answer

Yes, in part. Invoice number XXXX dated the XXXX will need to be apportioned as the works associated with the removal of a kitchen cupboard on the same invoice are not deductible and regarded as an improvement.

Question 5

Are the out of pocket expenses you incurred for the works on theveranda andsecond level balcony considered a deductible repair?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

In XXXX you purchased an investment property.

You did not obtain an initial building inspection or report at time of purchase.

At the time of purchase, it was identified that drains around the property were not functioning correctly and required replacing.

You self-assessed that these works required to fix the drains were capital works and have not claimed a deduction for the invoice dated XXXX for the amount of $XXXX

The property has been consistently rented the entire time you have owned it.

In XXXX when the last tenant vacated the property it was identified by the real estate that there was an issue with the rear external stairs sinking into the ground.

The tenant did not report any concerns while renting the property.

You engaged a contractor who advised that there was significant water damage underneath the property.

The contractor identified that the original drain works completed in XXXX failed and would require replacing again.

The works undertaken were to the following areas of the house

·        The external staircase

·        Veranda

·        Second level balcony

·        Strom water drains

·        Realign house level

Invoices for these works are as follows

·        XXXX for the amount of $ XXXX dated XXXX

·        XXXX for the amount of $ XXXX dated XXXX

·        XXXX for the amount of $ XXXX dated XXXX

·        XXXX for the amount of $ XXXX dated XXXX

Small maintenance repairs to other areas of the house where also completed.

These smaller repairs are on a combined invoice with works to the foundation of the house. Invoice number XXXX for the amount of $XXXX dated XXXX.

This invoice also included the removal of a kitchen cupboard to make room for a dishwasher.

You have not put an insurance claim in for the damages.

You also have not sought compensation from the initial contractor.

The property remained vacant and untenanted while the works were completed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 division 40

Income Tax Assessment Act 1997 division 43

Reasons for decision

Work that is not capital in nature such as replacing the failed drain pipes, damaged staircase, re-levelling the property and maintenance of the property are deductible as repairs.

Section 25-10 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.

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.

Veranda and second level balcony

In your case, the property was damaged due to water damage from failed previous capital to the drainage system.

As a result the veranda and second level balcony were reconstruction entirety and therefore has been substantially improved. As highlighted above, a repair replaces a part of something or corrects something that is already there.

It is acknowledged that a repair will have a certain amount of improvement, however the work done is more than just restoring what was there. Such work is regarded as an improvement and therefore capital in nature.

As the costs of construction a new veranda and second level balcony on your rental property is capital in nature, the associated expenses in relation to the veranda and second level balcony are not deductible as repairs. However a capital works deduction is allowed under Division 43 of the ITAA 1997.