Edited version of private advice

Authorisation Number: 1052249114883

Date of advice: 8 May 2024

Ruling

Subject: Deductions - repairs

Question 1

Can the Estate claim the cost of repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Not necessary to answer

Question 3

Not necessary to answer

This ruling applies for the following periods:

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

The scheme commenced on:

1 September 20XX

Relevant facts and circumstances

The building has been an investment property since acquisition in 20XX and held solely for income producing purposes during this time.

The building structure was damaged through water retention caused by the adjacent property owner not providing adequate drainage and moisture protection.

The Estate has commenced remediating the damage. The repairs including the removal of the existing cement render, an injection of a liquid chemical to displace the moisture within the bricks and mortar and also re-rendering the affected walls.

Relevant legislative provisions

Section 25-10 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Question 1

Summary

The works undertaken by the Estate are considered repairs and deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

Section 8-1 Deductible expense

Section 8-1 of the ITAA 1997 states that you can deduct any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. You cannot deduct amounts under section 8-1 to the extent that the loss or outgoing is capital or private in nature or is incurred in relation to gaining or producing exempt or non-assessable non-exempt income.

Section 8-10 of the ITAA 1997 prevents double deductions by specifying that if two or more provisions under the Act allow a deduction in respect of the same amount, you can only deduct an amount under the provision that is the most appropriate.

Taxation Ruling TR 97/23 Income tax: deductions for repairs(TR 97/23) at paragraph 7 provides the following:

Which provision is the most appropriate is an objective question. In our view, if both sections 25-10 and 8-1 allow you to deduct the same amount, section 25-10, being the provision that deals specifically with repair expenditure, is the most appropriate provision.

Section 25-10 Deductible expense

Subsection 25-10(1) of the ITAA 1997 states that you can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income.

TR 97/23 explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction.

The relevant paragraphs from TR 97/23 have been extracted as follows:

13. The word 'repairs' has its ordinary meaning. It 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.

14. Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property.

15. 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. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

16. To repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10.

Application to your circumstances

In these circumstances, the building was acquired in September 20XX and has been held solely for income producing purposes. The works that have been carried out are to remedy the damage caused by water retention in the brick work and to prevent further contamination by mould and salts due to the rising damp. These works have been undertaken to make good damage that has occurred by natural causes during the passage of time as per paragraph 15 of TR 97/23. The works undertaken by the Estate are considered repairs and deductible under section 25-10 of the ITAA 1997.