Edited version of private advice

Authorisation Number: 1051781751910

Date of advice: 18 November 2020

Ruling

Subject: Deductions - rental properties

Question

Are you entitled to any deduction in relation to your share of the costs incurred in relation to the Property under either section 8-1 or 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Income year ending 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

Background

You, being Person A and B, purchased the property (the Property) as joint tenants in 20XX for $XXX,XXX, with settlement occurring after several months.

The vendor of the Property was Company A.

A character home is located on the Property which had been substantially renovated prior to you purchasing it.

The contract of sale contained express warranty by Company A that any structures built during its ownership of the Property had been built in accordance with the approval of the relevant authorities.

Shortly after settlement occurred you discovered that several non-complying structures had been built on the Property during Company A's ownership. This included the boundary fence separating the Property and the adjoining property, being Lot X, not being located on the correct boundary line with part of the land area of both properties being located on the wrong side of the existing boundary fence.

Several months after settlement occurred, you commenced legal action to address the issue of the boundary fence and the non-complying structures, incurring expenses in relation to this issue as outlined below.

Lot X was owned by Company A when you purchased the Property, which they sold to another party several years after you purchased the Property.

At all times during the period covered by this ruling you held the Property for the sole purpose of earning rental income, with the Property being leased to an unrelated party for market rental. A reduction of rent was applied during the period of the works relating to the boundary fence issue as outlined below.

Legal proceedings

Several months after settlement on the purchase of the Property occurred you commenced legal proceedings in the Magistrates Court against Company A seeking a court order that:

• the boundary fence between the Property and Lot X was on the incorrect boundary; and
• Company A was liable to contribute to the costs incurred in relation to those activities.

After several months Company A filed a defence to the court proceedings alleging:

• the fence was not in need of repair
• rectifying the fence would have a negative impact on Company A's property; and
• the orders sought were not required or appropriate.

During the following year Company A commenced proceedings in the Supreme Court against you seeking orders:

• for the realignment of the boundary fence between the Property and Lot X; and
• that the Magistrates Court proceedings be transferred to the Supreme Court.

After a number of months, mediation between the parties involved in the Supreme Court proceedings occurred and an agreement was reached by the parties to settle the issue without any admissions of liability, on the terms agreed by the parties during the mediation, which became immediately binding for each party.

Several months later a Deed of Settlement and Release (the Settlement Deed) was executed between you, Company A and other parties to resolve the Supreme Court proceedings which included the following information:

Boundary dispute

The following activities would be undertaken in relation to the boundary fence to the areas as shown in the areas in the plan (the Plan) as provided below:

• a specified area of the fence, being the title boundary between the Property (referred to as Lot A) and Lot X (the adjoining property) be re-aligned to the western side of the existing parapet wall
• a specified area of the fence, being a rendered brick retaining wall on the title boundary between Lot A and Lot X, be re-aligned to reflect the current position of the existing parapet wall
• a specified area of the fence, the re-alignment of the fence in accordance with the current title boundary between Lot A and Lot X which would include the following works:
• existing coffee stone retaining wall and fences on the Lot A be removed
• new retaining wall be constructed on the Lot A side of the title boundary, to be finished with render and painted in accordance with the colour scheme of the Existing parapet wall
• subject to obtaining development approval (DA), a new parapet wall (fence) to sit on top of the above retaining wall to be made from materials that allow for it to be rendered and painted in accordance with the colour scheme of the Existing parapet wall
• if the DA for the above parapet wall is not received within a specified number of months, a new boundary fence is to be constructed of materials as close to the existing fence as possible
• the existing trees and planter box wall on Lot A to be removed
• all work as outlined above to be paid by you.
• a specified area, being the retaining wall and fence line is to be re-aligned to the current title boundary, a specified distance from the existing retaining wall; and
• you were to engage a licenced surveyor to prepare an interest only deposited plan and effect the subdivision of the land, including the issuing of new titles for Lots A and X to reflect the re-alignment. The costs for the surveyor was to be split between you and the other parties.

Non-complying structures

The specified party representing Company A will use all reasonable efforts, including signing documentation as requested by you, to assist in gaining retrospective approval for the non-complying structures on Lot A.

Costs

Each party is to pay their own costs:

• for their legal representative/s, conveyancer or settlement agent in relation to the respective transfers in relation to the re-alignment, including transfers of land and new titles.
• for their own legal costs in relation to the preparation, execution, completion and performance of the Settlement Deed, or any other related document.

The cost for the independent licensed surveyor for the work outlined above is to be split between you and the other parties equally.

Activities undertaken in relation to the relocation of the boundary fence

The original boundary fence between the properties was XX.X metres in length, constructed of PVC fence panels and posts. XX metres of the original fence, being estimated as more than 80% of the fence, was constructed on top of a retaining wall.

The following activities were undertaken in relation to the boundary fence:

• the existing fencing panels were removed and retained for reuse
• the retaining wall was moved and reconstructed at the correct position in accordance with the Settlement Deed
• More than 25 metres of the new boundary fence was constructed on the reconstructed retaining wall using panels and posts from the original fence in two parts separated by the parapet; and
• a more than a 6-metre section of the original fence was not relocated but was replaced with a parapet wall dividing the two properties. This area is estimated to be around 20% of the original boundary fence.

Costs incurred in relation to legal proceedings and activities arising in relation to the boundary fence issue

You have determined that the expenses incurred in relation to the cost of constructing the parapet are not deductible on the basis that it was an improvement and have apportioned some of the expenses incurred in accordance with portion of the fencing attributable to the parapet.

It is estimated that the following expenses were incurred in relation to the legal proceedings and the relocation of the boundary fence in accordance with the Settlement Deed:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-10

Reasons for decision

General deductions

Under section 8-1 of ITAA 1997 you can deduct for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are of a capital, private or domestic nature.

Deductions for repairs

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to the property used for income producing purposes.

However, expenses which are capital, or of a capital nature are not deductible as repairs or maintenance. The following are examples of expenses which are capital or of a capital nature:

• replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)
• improvements, renovations, extensions and alterations, and
• initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable under section 25-10 of the ITAA 1997.

TR 97/23 states that in its context in section 25-10, the word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

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.

Expenditure for repairs to property is capital expenditure if the expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety.

Entirety

Renewal, replacement, or reconstruction of, the whole or substantially the whole of a thing or structure (entirety) is likely to be considered a capital improvement rather than a deductible repair.

The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' (Lindsay v FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201 (the Lindsay case)).

In the Lindsay case, the taxpayer company was a slip proprietor and ship repairer. It claimed a deduction for the cost of reconstructing one of two slipways. In finding that the work was not repairs, Kitto J rejected the taxpayer's submission that either the whole slip (comprising the slipway, hauling machines, cradles and winches by which vessels were manoeuvred on to it) or the whole of the business premises containing the slipway should be regarded as the relevant entirety. His Honour decided that the slipway was an entirety by itself and not a subsidiary part of a larger whole.

In the case of WG Thomas & Co Pty Ltd v FC of T (1965) 115 CLR 58; (1965) 14 ATD 78, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building.

Relevantly, paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered to be a subsidiary part rather than the entirety.

Property is more likely to be an entirety, as distinct from a subsidiary part, if:

• the property is separately identifiable as a principal item of capital equipment; or 
• the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or
• the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or
• the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.

Initial repair

Paragraph 59 of TR 97/23 states that expenditure incurred on an initial repair after a rental property is acquired, where the expenses are incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10 of the ITAA 1997.

The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred.

Paragraphs 60 of TR 97/23 state that the main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration:

(a)          existed at the time of acquisition of the property; and

(b)          did not arise from the operations of the person who incurs the expenditure.

It is not considered material whether you were aware of the condition or the need for repair of the property at the time of purchase. Expenditure on initial repairs lacks a connection to the income producing activities of the property and is considered an additional cost of acquiring the property or an improvement in the quality of the property you acquired.

An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit - yielding structure. It is capital expenditure and is not deductible under section 25-10 of the ITAA 1997.

Application to your situation

In your situation you acquired the Property as joint tenants and discovered shortly after settlement that a boundary fence was not located on the correct boundary line between the Property and the adjoining property, and that some of the structures located on the Property were non-complying.

We have taken the following into consideration when determining whether you are eligible to claim any deductions under sections 8-1 or 25-1 of the ITAA 1997 in relation to your share of the costs incurred due to the activities undertaken to rectify the boundary fence issues and the legal costs you incurred.

You were not aware of the boundary fence issue or the non-complying structures located on the Property when you purchased it, only becoming aware of these issues shortly after settlement on the purchase of the Property had occurred.

Several months after settlement occurred you initiated legal proceedings against Company due to this identified issue arising in relation to the physical location of the boundary fence which was different to what was on the title of the Property. This resulted in you incurring legal expenses for legal proceedings in relation to the non-complying structures and boundary fence issues, incurring costs for activities associated with the removal of the boundary fence and retaining wall and the reconstruction of the retaining wall and the boundary fence at the boundary line as outlined in the Settlement Deed. Additional expenses were incurred as a result of the activities undertaken in relation to the rectification of the boundary fence issue.

As a result of the Settlement Deed the whole fence was pulled down and:

• the old retaining walls were removed with new retaining walls being constructed at a different location, with more than 25 metres of fencing being constructed on the new retaining walls using materials kept from the original fence; and
• more than 6 metres of the original fence was replaced with a new parapet. It is stated that this portion of the activities is considered to be an improvement.

While you received rental income from the Property following its purchase, the issues raised in the court proceedings did not occur, and are not attributable, to damage or defects that occurred to the Property during the period that it has been used by you for rental purposes, or during your ownership period.

The expenses were not incurred as a result of any action in relation to any of your tenants and/or their use of the Property.

Nothing has been provided to support that these issues had impacted on the amount of rental income you received in relation to the Property, other than the reduced rental you allowed your tenant to pay during the period the activities were being undertaken to compensate them for any disruption in relation to their use of the Property during the period the activities were undertaken.

These issues existed prior to you purchasing the Property. Therefore, it can be viewed that the expenses you incurred were to bring the Property into its correct state in accordance with the title of the Property and/or to have the title reflect any changes to the Property as a result of the activities undertaken to rectify the existing issues in accordance with the Settlement Deed.

As outlined above, it is not material that you were not aware of the boundary fence issue when you purchased the Property, and that the activities undertaken in accordance with the Settlement Deed are not viewed as being connected to the rental income earned from the Property.

You sought to have the issues addressed shortly after you had acquired the Property, commencing legal action several months after settlement on the purchase of the Property had occurred.

By rectifying these issues, you are viewed as having received enduring benefits that relate to your ownership interest in the Property and the final state and nature of the Property. The activities restored the physical land area of the Property and improved the state of the Property to reflect the characteristics of the Property as shown on the new title deed.

Additionally, it has removed any potential issues in relation to any future sale of the Property and disposal of your ownership interest in the Property, from any potential legal action from the purchaser in relation to the boundary fence of the Property not being located in accordance with the Property title. Therefore, it has freed you from any challenges in relation to your ownership interest in the Property, either in the future when you sell the Property, or from any owner of Lot X, being either the current or future owner/s.

Rental Property 2020 (the Rental Property Guide) provides guidance in relation to claiming deductions in relation to rental properties and includes the following at page 17:

Legal expenses

Some legal expenses incurred in producing your rental income are deductible. These include the costs of:

•         evicting a non-paying tenant

•         taking court action for loss of rental income

•         defending damages claims for injuries suffered by a third party on your rental property.

Most legal expenses, however, are of a capital nature and are therefore not deductible. These include costs of:

•         purchasing or selling your property

•         resisting land resumption

•         defending your title to the property.

By undertaking the legal action you were not trying to maintain your existing position in relation to the land area of the Property, but were seeking to have it changed to being more in accordance with the title deed and to avoid any potential loss of part of the title to the Property.

In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. FC of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190).

The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. Expenditure is capital in nature where it is made with a view to bring into existence an asset or advantage that is of enduring benefit. Capital expenditure is characterised by the fact that it is usually a one-off payment and establishes, replaces or enlarges the income producing asset.

In your situation the legal action was undertaken to have the original boundary fence moved to the correct boundary line as part of the fencing between the Property and Lot X were on the wrong side of the correct boundary fence line.

In undertaking the legal action you were seeking to rectify the issue of the boundary fence being located in the incorrect position and ensure that the land of both properties was correctly identified by the boundary fence issue. Additionally, legal expenses were incurred in seeking Company A to rectify the status of the non-complying structures on the Property so that they complied with relevant regulations.

These issues existed from the time the Property was acquired. The outcomes you were seeking from the legal proceedings were of an enduring benefit with you being able to access all the land of the Property, to be used in conjunction with the dwelling located on the Property for income producing purposes. The rectifying of the compliance of the structures with the relevant regulations would impact on your use of the Property during your ownership period and any potential sale of the Property.

The legal expenses were not incurred in relation to any disputes in relation to the leasing or rental of the Property with your tenant, but in relation to the Property and structures located on it. Therefore, it is not viewed that they were incurred in relation to the earning of your share of the rental income in relation to the Property.

As the advantage being sought from the legal action was of an enduring nature in relation to your ownership of the Property, they are viewed as being capital in nature and not deductible. The effect of the activities being undertaken was to change the Property's functional capacity that had not been originally there in accordance with the title of the Property during your ownership interest, putting the Property into a condition that is reflected on the title of the Property.

Therefore, you cannot claim a deduction in relation to your share of the legal expenses and they will be included in the cost base of your ownership in the Property.

In respect of entirety, 'property' does not mean the whole item, but an item that can be an entirety in its own right while being part of a larger item, such as fencing being an entirety in its own right while being part of a residential property. In your situation the fence and retaining walls are considered to be an entirety in their own right, being separate from the residential house located on the Property, with separate functions.

The issue of repairs to retaining walls has been considered in several cases, including Case S13, 85 ATC 171 (Case S13) and Mt Isa Mines Ltd v FC of T 90 ATC 4267 (Mt Isa Mines Ltd) as follows:

In Case S13, two retaining walls built on a rental property to prevent soil erosion were each held to be an 'entirety'. The replacement following storm damage, with two new retaining walls which were higher, stronger and of different material, was held to be an improvement to a fixed capital asset and not repairs.

In Mt Isa Mines Ltd a mining company constructed a retaining wall to create a tailings dam on a mine site. The retaining wall was intended to be the first stage of a much larger development. Following seepage through the retaining wall a new retaining wall, or embankment, was constructed with the result that the old retaining wall was submerged. The Federal Court held that the expenditure incurred in building the new retaining wall was not deductible because it was an outgoing of capital or of a capital nature and did not constitute repairs to the old retaining wall or to the dam.

As provided in the cases above, retaining walls can be viewed as being an 'entirety' in their own right. In this case expenditure was incurred in relation to the retaining wall in accordance with the Settlement Deed. These activities involved the removal of the existing retaining wall in its entirety and reconstruction of a new retaining wall in its entirety.

Therefore, to the extent that you incurred expenses in relation to your ownership interest in the Property as a result of the retaining wall related activities, those expenses are not deductible under either sections 8-1 or 25-10 of the ITAA 1997 because the whole of the retaining wall was removed and replaced in its entirety and the related expenses are viewed as being capital expenditure.

Additionally, the whole fence was removed. While a parapet had been constructed on a small portion of the location on which the previous fence had been situated, it does not change the fact that the whole fence was removed.

The fence, other than the portion where the parapet was constructed, was then constructed in accordance with the Settlement Deed using the materials from the original fence. However, this does not change the nature of the expenditure that you incurred in relation to these activities, being expenses arising in relation to rectifying defects that existed in relation to the Property when it was purchased, making them initial repairs that are capital in nature.

While general garden maintenance is an allowable deduction where, such as paying someone to mow lawns, maintain garden beds or prune trees. However, landscaping is considered to be an improvement and therefore it is not an allowable deduction as a repair under section 25-1 of the ITAA 1997 or as a deduction under section 8-1 of the ITAA 1997.

While rectifying the boundary fence issue, you incurred expenses to return the Property to a similar condition it was in prior to those activities, such as replacing damaged lawn and garden remediation. As outlined above, costs incurred in relation to landscaping activities are not deductible under either sections 8-1 or 25-1 of the ITAA 1997. Additionally, the cost of installing gardens is not regarded as capital works or depreciating assets and no deduction is allowed for these costs.

Ruling decisions are based on the facts of the situation being ruled on and are not an audit and/or objection for which arguments, contentions and/or assertions are provided. However, the following statements and references to court cases and TR 97/23 have been made in the ruling:

• It is stated that before the boundary fence was moved, it partly enclosed some of the Property with Lot X. This led to the likelihood of the owner of the adjoining property acquiring title to that part of the Property by the doctrine of adverse possession after the passage of sufficient time.

However, this did not occur in the current situation and is hypothetical. Therefore, we have not considered the doctrine of adverse possession in relation to your situation.

• It is stated that the boundary fence is commercially and functionally inseparable from the house on the Property and only exists because the house exists.

As outlined above a fence, and also a retaining wall, are considered to be an entirety in their own right, with their own function, which for the fence has been provided by you as being to prevent or impede any occupants from the adjoining property entering the Property. This is separate from the function provided by the house.

• It is stated that without the house there would be no occupants at the Property and there would be no need for the boundary fence.
• This is hypothetical as the house does exist in your situation. Additionally, the house is what earns the rental income and if there was no house located on the Property then it is unlikely that any income would be earned in relation to the Property, and therefore possibly no eligibility to any deductions due to no assessable income being earned in relation to the Property.
• It is stated that the fifth element of the cost base of the Property does not apply to these expenses and will only be included in the cost base if they are capital in nature.

Taxation Determination TD 98/19 outlines that initial repair expenditure incurred after the acquisition of a capital gains tax asset is included in the fourth element of the cost base and reduced cost base of the asset. As outlined above, it is viewed that the expenses incurred in relation to the boundary fence issue were initial repair expenditure.

The fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset. The expenditure can include giving property under section 103-5 of the ITAA 1997.

FC of T v Duro Travel Goods Pty Ltd (1953) 87 CLR 524; 10 ATD 176

It is stated that your case is analogous to this case because, as the successful taxpayer did in that case, you incurred legal expenses merely in seeking to enjoy the title to the income producing asset to the fullest extent, but not to establish the entirety of that title itself.

Expenses incurred for the purpose of increasing the inherent value or improving the title of particular capital assets is ordinary capital in nature. For example, costs incurred in seeking amendments to patent specifications to render the patent rights more effective, secure or valuable are not deductible (9 CTBR Case 44).

This includes expenditure to protect or defend title to capital assets which is generally capital in nature and not deductible under section 8-1 of the ITAA 1997 ( Broken Hill Theatres Pty Ltd v FC of T (1951) 9 ATD 306, 423 ; (1952) 85 CLR 423).Such expenditure may, however, be eligible to be included in the cost base of the asset for capital gains tax purposes.

Based on the information provided with the ruling you were not wishing to exploit your existing rights in relation to the Property, but were seeking to establish your ownership of the land that should have been part of the Property, but which was being used by Lot X to be a truer reflection of the title of the Property.

Hallstroms Pty Ltd v FC of T ((1946) 8 ATD 190; (1946) 72 CLR 634) (Hallstroms case)

It is stated that your case is analogous to the Hallstroms, because you did not gain an additional asset by incurring legal expenditure or in performing the works, they simply prevented part of the title to their asset from being taken by the owner of the adjoining property. Therefore, the legal expenditure incurred to establish their right to conduct the works, and the Works themselves, are of a revenue not a capital nature.

If a taxpayer attacks another party ' s title to a capital asset by alleging a superior title, his or her expenses will also be of a capital nature as being incurred in attempting to acquire a capital asset. However, that was not the situation in Hallstroms.

In Hallstrom, the applicant had not asserted any claim to the invention, but rather had argued that the patentee had already been adequately compensated for its invention over the original period of exclusive manufacturing rights, so the invention should be made available to all manufacturers. The applicant had merely sought to maintain that position, not seeking or gaining any new exclusive right or advantage with it being held by the majority of the Full High Court that in those circumstances the objection costs were of a revenue nature.

However, in your situation you undertook the legal action seeking new rights, being access to land that was previously held in for the exclusive use of Lot X that was not in accordance with the original titles, and seeking exclusive right and advantage in having the boundary fence issue resolved, with a new title deed being issued to reflect the nature of the Property which had not previously existed.

Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337

It is stated that in your situation expenditure was not incurred to establish, replace or enlarge a profit-yielding structure, but to better establish your claim to part of their profit-yielding structure and the costs of repairing the boundary fence are also deductible, not only the legal costs incurred in the process of establishing your claim against the owner of Lot X their right to do so.

Outgoings incurred for the purpose of enlarging or otherwise altering the organisation or structure of the profit-yielding subject are of a capital nature and not deductible under section 8-1 of the ITAA 1997.

The expenditure incurred in relation to the boundary fence issue is viewed as non-current unusual expenditure that had been made for the purpose of obtaining permanent advantage in relation to your ownership right to the Property as supported by the title of the Property which:

• involved the obtaining of an enduring benefit of being able to offer the whole of the Property your ownership interest legally entitled you and your tenants to have access to
• on any eventual sale of the Property, you could enjoy any return received from the sale of the Property without any potential legal action being taken against you as a result of the Property having the material nature as provided on the original title; and
• excluded anyone else from having any claim against you in relation to your ownership interest in any part of the Property.

Lindsay v FCT (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201

It is stated that the boundary fence in your situation is a far less significant part of your income earning property than the slipway was in the Lindsay case. The boundary fence does have significance for the premises but is not of major economic significance and serves no economic purpose separate from the rest of the premises. It only serves an economic purpose, in enhancing the amenity of the property for the occupants.

In accordance with the findings of the Lindsay case, the slipway was an entirety by itself and not a subsidiary part of a larger whole. In applying the findings in that case to your situation it can be viewed that the fence and the retaining walls are both viewed as entireties in their own right. They are not viewed as a subsidiary part of a larger whole, such as a wall in a residential house.

Example 4 in TR 97/23

It is stated that your situation can be distinguished from the taxpayer in the example as a fence has a more integral part of the economic function of a farm than for a residential property and the fence in your situation had been constructed from former fencing materials, with no new fencing materials being required or purchased.

For farmers a fence is a depreciating asset and while this may be different to residential property fences it doesn't automatically change the outcome in relation to the deductibility of expenses incurred in relation to them.

• Paragraph 40 of TR 97/23

It is stated that none of the examples provided are relevant to determining whether a boundary fence on a residential property is an entirety.

On page 18 of the Rental Property Guide is it stated that the following examples are of expenses that are capital or capital in nature:

• Replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)
• Initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

It also outlines on that page that you cannot claim a deduction for improvements such as landscaping.

Conclusion

Based on the information provided, and applying the relevant legislation and principles contained in TR 97/23 to the facts of your situation, it has been determined that you are not entitled to claim deductions under either section 8-1 or section 25-10 of the ITAA 1997 in relation to the $35,671.14 of expenses incurred in relation to the Property.

It is viewed that the expenses were incurred in relation to the initial repair to rectify the issue of the boundary fence issue that existed when you purchased the Property and was identified shortly after settlement had occurred. Therefore, these expenses are capital in nature and are not deductible under either section 8-1 or 25-10 of the ITAA 1997.

Note: While a deduction cannot be claimed for the expenses covered in this ruling under either section 8-1 or 25-10 of the ITAA 1997, a capital works deduction contained in Division 43-B of the ITAA 1997 may be allowable for any construction expenditure that is not excluded under subsection 43-70(2) of the ITAA 1997.

If those expenses are not deductible under Division 43-B of ITAA 1997, then they may be included in the cost base of the Property.