Edited version of private advice

Authorisation Number: 1052213731672

Date of advice: 20 February 2024

Ruling

Subject: Rental deductions - initial repair

Question

Is the cost of resurfacing the pool at your rental property deductible as a repair under section 25-10 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your spouse own a property.

When the property was purchased no building inspection was undertaken and as a result the defect of the pool was not identified.

Your real estate agent notified you that the tenants contracted skin irritations whilst using the pool at the rental property.

You requested a pool care contractor to examine the pool and found that the pool surface was compromised causing glass fibres to contaminate the water causing irritations.

You requested a quote from a tradesperson to resurface the pool. You accepted the quote and the resurfacing of the fibreglass pool was completed.

The property was tenanted during the pool resurfacing.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Summary

The cost of resurfacing the pool at your rental property is not deductible as a repair under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Under section 8-1 of ITAA 1997 you can deduct 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. You have rental income and can claim certain rental expenses as a deduction.

Subsection 25-10(1) of the ITAA 1997 allows a deduction for the cost of repairs to premises, or a part of the premises, used solely for income-producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs that are considered capital expenditure. Division 43 of the ITAA 1997 allows deductions for capital works expenditure.

Initial repairs

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction.

Paragraphs 59 of TR 97/23 provides that expenditure incurred on an initial repair after a property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and not deductible under section 25-10 as a repair.

Paragraph 60 of TR 97/23 states 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.

Paragraph 61 of TR 97/23 includes that it is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs. 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.

Application to your circumstances

You purchased the property on XXXX and within several weeks you were notified of damage or deterioration to the pool and began rectification work. It is considered that the damage to the pool was present at the time you purchased the property as the type of damage sustained by the pool is not the type of damage to happen immediately, but cumulatively over time. While you did not undertake a building inspection it is not considered relevant if you were aware of any damage at the time you purchased the property. The expenses incurred were for initial repairs which returned the pool to its original efficiency of function when initially constructed, but before you became the owner of the property. You are not entitled to an immediate deduction as a repair under section 25-10 of the ITAA 1997. The expenses incurred can be claimed as capital works.