Edited version of private advice

Authorisation Number: 1052351285779

Date of advice: 6 March 2025

Ruling

Subject: Rental property - deductions

Question 1

Is the underpinning work conducted at the Property deductible as a repair pursuant to section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)

Answer 1

No.

Question 2

Is the underpinning work conducted at the Property considered to be capital works and therefore deductible as capital works pursuant to Division 43 of the ITAA 1997?

Answer 2

Yes.

This private ruling applies for the following period:

Year ended X June 20XX.

The scheme commenced on:

X July 20XX

Relevant facts and circumstances

You purchased the Property on XX XX 19XX.

You began renting out the Property in XX 19XX.

In XX 20XX, you received a letter from a Government department.

The letter advised you that an inspection was conducted at the Property and the Property was deemed unsafe or unsuitable for human habitation.

Subsequently, an Order was issued to you in respect of the Property.

The Order directed you to remediate identified defects by a specified date.

The following defects were identified during the inspection:

•                    List of defects provided.

These defects were considered 'moderate' in risk level.

Underpinning Specialists provided you with a quotation of $XX,XXX.

An engineer inspected the Property and provided a structural report.

The report provided by the engineer show that the underpinning was to occur at X locations distributed beneath the entire existing foundations. The underpinning consisted of X concrete pads and X piers.

The scope of the work included:

•                     List of works provided.

The work was completed in the 20XX-XX financial year.

As at completion of the underpinning, the market value of the Property was approximately $XXX,XXX.

The underpinning works cost approximately $XX,XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Question 1

Repairs and capital works

Section 25-10 of the ITAA 1997 provides that you can deduct expenditure you incur for repairs to premises that you held solely for the purpose of producing assessable income to the extent of your legal ownership in the property. However, subsection 25-10(3) of the ITAA 1997 states that a deduction is not allowable for capital expenditure. The cost of an improvement to property is capital expenditure.

Taxation Ruling TR 97/23 Income tax: deductions for repairs states some factors that point to work done to property being 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.

Underpinning

The issue of whether underpinning foundations is repairs or capital works was considered in AAT Case V2 88 ATC 107 (Case V2). In that case a block of flats was built on improperly compacted landfill and the foundations in one corner of the property were found to be barely adequate. The repairs involved removing the previous foundations in that corner and replacing it with three columns on a solid wall foundation. It was concluded in this case that the partial underpinning of one corner of the building's foundations was a repair, but it was also stated that if the entire building's foundations had of required underpinning then the work would not have been a repair.

In Case V2 Senior Member Mr Beddoe quoted, with approval, ACT Construction Ltd v Customs & Excise Commissioners [1979] 2 All ER 691 (ACT Construction case). In the ACT Construction case certain houses had suffered subsidence due to shallow foundations. The foundations had complied with the building codes at the time the houses were built but did not comply with the more modern codes. In rectifying the problem, it was necessary to underpin the existing foundations. It was held that underpinning the entire foundations of the house did not constitute a repair.

Application to your circumstances

An engineer recommended the entire property be underpinned to ensure structural integrity. Similar to the ACT Construction case outlined above, it was deemed necessary that the entire property be underpinned. By underpinning the entire dwelling, a complete additional sub-structure has been added to the dwelling. An additional sub-structure is considered a capital item.

Also, the underpinning is considered to constitute an improvement to the Property in this case. The underpinning cost of $XX,XXX represents a substantial percentage (approximately 20%) of the estimated market value of the Property of $XXX,XXX. It is considered that such a large outlay would have resulted in more than an incidental or minor increase in the Property's worth. The work is also considered to have significantly enhanced the Property's saleability and expected life.

As the cost of the underpinning in this case is considered to be capital expenditure, it is not immediately deductible in the year of income.

Question 2

Where expenditure is not immediately deductible under section 25-10 of the ITAA 1997 because of its capital nature, the expenses may be deductible under Division 43 of the ITAA 1997.

Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements addresses a number of matters that are relevant in determining entitlement to, and the amount of, a deduction under Division 43 of the ITAA 1997 in respect of expenditure on the construction of assessable income producing buildings and other capital works. It also identifies certain expenses that are included in construction expenditure.

Paragraph 7 of TR 97/25 outlines the three categories of capital works in respect of section 43-20 of the ITAA 1997 as:

•                     Buildings or extensions, alterations, or improvements to buildings

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

•                     Environment protection earthworks.

Application to your circumstances

The amount of the claimable deduction depends on when the construction started, the type of construction and the purpose for which the completed capital works are used. For construction started after 15 September 1987 the amount of claimable deduction is 2.5% of the construction expenditure per year over a period of 40 years.

The expenses you incurred to underpin the Property are considered to be capital works expenditure and you are entitled to a deduction for capital works in accordance with Division 43 of the ITAA 1997.