Edited version of private advice

Authorisation Number: 1051873717235

Date of advice: 23 July 2021

Ruling

Subject: Rental properties - deductions - repairs

Question:

Can you claim a full deduction for The Expenses incurred in relation to the Propertyunder section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes. Based on the information provided, and applying the principles contained in Taxation Ruling TR 97/23 and Taxation Ruling TR 97/25 and the provisions contained in Division 40 of the ITAA 1997, it is not viewed that the Expenses are of the nature of either capital works or capital allowances.

The activities undertaken in relation to, and associated with, the foundation and damp issues at the Property were undertaken to rectify those issues. The activities have not taken the Property to a condition beyond what it had been when you had originally acquired it.

Therefore, to the extent that The Expenses were incurred in relation to the activities undertaken on or in relation to, the Property as a result of the foundation and damp issues, and you paid them, you will be able to claim a deduction for the amounts included in The Expenses under section 25-10 of the ITAA 1997.

This ruling applies for the following period

Income year ending 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

You purchased the Property and lived there for several years before commencing using it for rental purposes, with it continuing to be used for this purpose from then until the present time.

The Property is held on Strata Title with a Body Corporate.

Several years after the Property commenced being used for rental purposes your neighbour in an adjoining property contacted you to query whether the Property had any internal cracks, with your neighbour indicating that they had foundation issues and internal wall cracks in their property. Other tenants also indicated that they had some external cracking mainly along the driveway which is a shared wall with your neighbours.

During your occupancy of the Property settlement, and the period it had been tenanted, the slab of the Property had appeared to be serviceable, but it had deteriorated to the point of needing work.

The Body Corporate raised the issue with their insurer, however the insurer viewed that the structural cracking was outside of the scope of the cover, with the policy designed for sudden and unforeseen events, such as single heavy storm causing the damage.

You submitted an insurance claim with your insurer as the original builders of the Property became insolvent soon after settlement on the purchase of the Property had occurred. However, your insurer determined that your claim had not been made within the warranty period.

You and your neighbour engaged the services of several companies (the Companies) to work collaboratively to undertake activities associated with, and arising in relation to, the correcting of the foundation and wall issues. You also reviewed eliminating moisture, removing nearby trees and investigating the roof structure to maximise the foundation stabilisation and wall repair as recommended in engineering reports.

It was determined that rectification works needed to be undertaken in relation to the foundation which had subsided which would involve the injecting of chemical resin into the founding soils at intervals along the settled sections of the building. Wall stabilisation needed to be undertaken to address cracking external walls and make them secure.

The Body Corporate approved the activities/works being undertaken by you but had not provided any funding in relation to the expenses you have paid, or that your neighbour had paid to rectify the issues arising in relation to their property.

The Companies had issued invoices for the amounts (the Expenses) arising in relation to their activities to address the foundation and damp issues, some of which related to both your and your neighbour's properties, and some of which you and your neighbour each paid half of the invoiced amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43