Edited version of private advice

Authorisation Number: 1052236977094

Date of advice: 5 April 2024

Ruling

Subject: Rental deductions

Question 1

Can you claim the cost of replacing the pool as a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No. As the installation of a new swimming pool is a replacement of an entirety, an immediate deduction is not available under section 25-10 of the ITAA 1997.

Question 2

Is a capital works deduction available under Division 43 of the ITAA 1997 for the installation of the swimming pool?

Answer 2

Yes. Section 43-210 of the ITAA 1997 provides the calculation for the capital works deduction. For post-26 February 1992 capital works, the deduction rate applicable, once the swimming pool is completed, is 2.5% over 40 years for capital works used in a deductible way.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You own a rental property.

This Property has been used to earn assessable income for many years.

The swimming pool at the Property was severely damaged by storms.

An excess of storm water resulted in water-soaked soil causing pressure on the swimming pool, causing the pool to fail.

The pool was found to be irreparable due to a structural failure that required the entire pool to be demolished and rebuilt.

Company A built a pool of the same size, shape, and materials with the same capacity as the existing pool.

The original pool and the new pool are constructed of concrete.

You received a small amount from your insurer in relation to the damage to the pool.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 section 43-25

Income Tax Assessment Act 1997 section 43-210

Reasons for decision

Question 1

Can you claim the cost of replacing the pool as a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

No. As the installation of a new swimming pool is a replacement of an entirety, an immediate deduction is not available under section 25-10 of the ITAA 1997.

Detailed reasoning

Section 25-10 of the Income Tax Assessment Act 1997(ITAA 1997) allows a deduction for expenditure incurred for repairs for the purpose of producing assessable income. Expenditure will not be deductible where it is capital in nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the circumstances in which expenditure incurred by a taxpayer is an allowable deduction under section 25-10 of the ITAA 1997.

The word 'repairs' is not defined in the legislation so takes its ordinary meaning. A repair ordinarily means the remedying or making of good of defects in, damage to, or deterioration of, property to be repaired. Repair for the most part is occasional and partial. It restores the efficiency of function of the property being repaired without changing its character. It 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 is the restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction, as distinguished from repair, is restoration of the entirety.

Paragraph 38 of TR 97/23 confirms that property is more likely to be an entirety if it is separately identifiable as a principal item of capital equipment, or the thing or structure is an integral part, but only a part of the entire premises and is capable of providing a useful function without regard to any other part of the premises.

The swimming pool is a structure considered to be an integral part of the rental property and it is capable of providing a useful function without regard to any other part of the rental premises. Consequently installation, renewal or removal of a swimming pool would constitute an entirety and therefore the expense is of a capital nature.

In your case you have incurred expenses in order to demolish and completely construct the new swimming pool. These works are considered to be replacing the swimming pool which is also considered to be an entirety. The expenses incurred are therefore not deductible under section 25-10 of the ITAA 1997.

Question 2

Is a capital works deduction available under Division 43 of the ITAA 1997 for the installation of the swimming pool?

Summary

Yes. Section 43-210 of the ITAA 1997 provides the calculation for the capital works deduction. For post-26 February 1992 capital works, the deduction rate applicable, once the swimming pool is completed, is 2.5% over 40 years for capital works used in a deductible way.

Detailed reasoning

Division 43 of the ITAA 1997 provides the deduction base for the purpose of working out capital works deductions for expenditure incurred in building relevant capital works. In your case, the relevant capital works is the construction of the swimming pool.

Construction expenditure is determined on the basis of the actual cost incurred in relation to the construction but does not include expenditure on demolishing the existing structure, clearing, draining, or preparing the site prior to constructing of the new pool.

Capital works on which construction started after 26 February 1992, the undeducted construction expenditure is worked out by reducing the construction expenditure by 2.5% per year from the time the capital works were first used for any purpose.