Edited version of private advice

Authorisation Number: 1051972286148

Date of advice: 12 April 2022

Ruling

Subject: Rental expenses - repairs or improvements

Question

Will the taxpayer be able to claim a 100% outright tax deduction in relation to the works undertaken on the retaining wall under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This private ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

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

The taxpayer owns an investment (rental) property with a boundary retaining wall that runs the full length of the property.

In 20XX safety concerns were raised by the tenants as the section of the wall beside the driveway was leaning inwards and the tenants stopped using the driveway for fear of collapse and the potential to fatally injure someone.

The taxpayer contacted the Council for clarification and financial assistance to rectify the issue on the boundary wall.

The Council upon review advised that the wall was inside the taxpayer's boundary and was not a dividing fence' for the purposes of the Fences Act 1995 and that any repairs would be at the taxpayer's cost, as the road reserve is exempt under this legislation.

In further correspondence the council went on to say:

The advice received from Council's consulting engineer is that an Emergency Order pursuant to Section 69 Development Act 1993 be issued unless you agree to engage your own structural engineer within the next couple of weeks to undertake an assessment to confirm the adequacy of the wall or propose some remedial works.... I will set this matter aside until XX XX XXXX to allow you the opportunity to arrange this. Please be advised that should you fail to comply with the above request Council is likely to issue an Emergency Order.

The taxpayer subsequently engaged a structural engineer, and the report was conclusive that the driveway section of the retaining wall needed to be replaced in its entirety.

The retaining wall is approximately XX metres in length with the damaged section alongside driveway approximately XX metres in length. The remaining length relates to the garage and backyard which were still structurally sound and not affected.

A suitable contractor was engaged to complete the recommended works, removing the section of the old wall and constructing the new retaining wall.

Due to changes in building requirements the wall was unable to be repaired with the same materials and modern materials were used in line with current building requirements.

The taxpayer is seeking to claim an outright tax deduction for the cost of the retaining wall as a repair rather than a 2.5% per annum deduction for capital works.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the taxpayer.

This is to explain how we reached our decision. This is not part of the private ruling.

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question

Will the Taxpayer be able to claim a 100% outright tax deduction in relation to the works undertaken on the retaining wall under section 25-10?

Summary

You are entitled to an immediate deduction under section 25-10 for the costs you incurred to replace a portion of the retaining wall.

Detailed reasoning

Repairs

Section 25-10 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 97/23Income tax deductions for repairs explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10, stating that in its context in section 25-10, the word 'repairs' has its ordinary meaning.

The 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.

Entirety

Paragraph 38 in TR 97/23 provides that property is more likely to be an entirety 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.

Distinction between a repair and an improvement

TR 97/23 considers the distinction between a repair and an improvement as determinative however an improvement provides a greater efficiency of function in the property - usually in some existing function, bringing the thing or structure into a more valuable or desirable form, state or condition compared to a repair (as discussed above).

Factors that may determine whether the work completed is an improvement rather than a repair include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life and the efficiency or function of the works completed.

Application to your circumstances

The boundary retaining wall on your rental property was beginning to lean over so you sought advice from relevant government body. You engaged a structural engineer that concluded the affected section of the retaining wall needed to be replaced in its entirety. You incurred costs associated with the demolition and replacement of the existing section of wall.

As discussed in TR 97/23, the word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

As the damaged section of the retaining wall was unable to be repaired, it was required to be demolished and replaced.

Due to changes in building requirements the damaged section was unable to constructed of the same materials and was replaced using different materials for structural soundness in line with current building techniques and requirements.

Although different material was used the work undertaken was for the purpose of restoring the function of the retaining wall.

As the work undertaken did not replace the wall in its entirety nor is it considered an improvement a deduction is allowable under section 25-10.