Private ruling: Rental property expenses
Published: July 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to your share of an immediate deduction for the cost of the root barrier installation, turf supply and lay and the portion of the equipment hire that relates to this work? | A1: Yes.

Relevant facts and circumstances: You are a co-owner of a rental property. The property has been available for rent or tenanted since it was purchased. When you purchased the property some minor cracks were evident throughout the house. In the second half of the 20XX financial year the cracks became more prominent and as a result the property became uninhabitable. The cracks were due to a foundation problem caused by trees surrounding the dwelling drawing moisture from the soil which destabilised the building's foundation. The tenant moved out and you had the foundation repaired. Other work on the property was undertaken at the same time. The property was re-tenanted once the work was completed. You have provided a copy of the invoice for the work done at your property. A root barrier was installed to protect the house from the surrounding trees so that the tree roots cannot gain access to under the building's foundation and to stabilise the moisture under the dwelling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10

Reasons for decision: Summary: Section 25-10 of the Income Tax Assessment Act 1997 (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. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) deals with the question of what is a repair for the purposes of section 25-10 of the ITAA 1997. At paragraph 13 it states: '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'. Taxation Ruling TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: • the repair is an initial repair • the extent of the work carried out represents a renewal or reconstruction of the entirety, or • the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair'. You are a co-owner of a rental property that has been rented out for a period of time. Although there were cracks in the walls when you purchased the property the work was not undertaken until some years later when the cracks had become so large as to make the property uninhabitable. Therefore, the work performed to rectify this issue is not considered to be an initial repair due to the significant change in the cracks. When work is done to restore or fix a damaged item, we need to determine if the work undertaken is a repair or an improvement. Repairs generally restore the item to its former function and efficiency whereas improvements increase an items functionality and/or efficiency. A repair may increase the items efficiency slightly and still be classified as a repair. However, where the items function or efficiency is improved substantially or the work changes the function of the item, the work is considered to be an improvement and capital in nature. Costs relating to improvements are not deductible as repairs but may qualify for a capital works deduction. | Detailed Reasoning - Root barrier installation: The root barrier was placed in the ground to prevent further deterioration of the foundations by tree roots. This work is considered to be part of the stabilisation of the building's foundations and therefore, constitutes a repair. Whilst the root barrier will prevent potential future problems it has not altered the structure of the foundation or the building and therefore, is not a structural improvement for tax purposes. | Detailed Reasoning - Conclusion: In your case the damage that occurred to the property which subsequently required the relevant repairs, can be attributed to the period of time that the property was used for income producing purposes. In accordance with TR 97/23 you are entitled to claim a deduction under section 25-10 of the ITAA 1997 for the cost of works which constitute repairs as discussed above.