Edited version of private advice

Authorisation Number: 1052040218557

Date of advice: 10 October 2022

Ruling

Subject: Rental deduction - capital works and repairs

Question 1

Will the cost of replacing mortar between bricks be deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer1

Yes

Question 2

Will the cost of replacing the damp course be deductible under section 25-10 of the ITAA 1997?

Answer 2

No

Question 3

Will the cost of replacing the damp course be deductible as a capital works expense under section 43-20 of the ITAA 1997?

Answer 3

Yes

This ruling applies for the following period:

Year ending 30 June 20XX.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

You jointly own a property (the Property).

The Property has been used to produce rental income for many years.

Recently you noticed that the mortar between the bricks is starting to crumble and fall out. This has the potential to cause some of the bricks to become dislodged.

You contacted an expert bricklayer for advice. They advised you that this is likely due to an incorrect mix of cement in the original mortar, rising damp and the effects of the weather over a significant period of time.

Based on this advice, you have contracted the bricklayer to repoint the damaged brick area with a mortar mix.

This mix includes liquid damp to strengthen the brickwork and seal it from the effects of the coastal weather.

You have also contracted another organisation to inject a damp course. The original damp course appears to have stopped being effective.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 43-20

Reasons for decision

Question 1

Summary

The cost of replacing the mortar between bricks will be deductible as a repair under section 25-10 of the ITAA 1997.

Detailed reasoning

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

In this situation, the replacement of the mortar between the bricks is part of a repair process and is not a replacement of an entirety. It was undertaken to maintain the brick wall and avoid brick damage. The Property is used for income producing purposes and a deduction is therefore allowed under section 25-10 of the ITAA 1997.

Question 2

Summary

The cost of replacing the damp course will not be deductible under section 25-10 of the ITAA 1997. It is an improvement rather than a repair and was undertaken to avoid future damage to the bricks and mortar of the Property.

Detailed reasoning

The meaning of repairs is considered in paragraphs 12 to 30 of Taxation Ruling TR 97/23 Income tax: deductions for repairs. In the case of a 'repair', broadly speaking, 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 - usually in some existing function. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement 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.

The replacement of the damp course will improve the Property and avoid future damage. It is therefore not deductible as a repair under section 25-10 of the ITAA 1997.

Question 3

Summary

The cost of replacing the damp course will be deductible under section 43-20 of the ITAA 1997.

Detailed reasoning

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

Capital expenditure occurs where work is done to renew or replace subsidiary parts of a whole.

There are 3 categories of capital expenditure outlined in section 43-20 of the ITAA 1997. These are:

•                     Buildings or extensions, alterations, or improvements to buildings

•                     Structural improvements or extensions, alterations, or improvements to structural improvements; and

•                     Environment protection earthworks.

In your case, the cost of the injection of the damp course is considered to be capital expenditure. The injection of the damp course is a structural improvement and will replace the existing damp course. The incorrect mix in the original mortar has likely resulted in the deterioration of the damp course over time and replacing the damp course is a remedial course of action to avoid future damage to the bricks and mortar of the Property.