Private ruling: Deduction - rental property
Date of advice: 22 February 2023
Published: 11 April 2023
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the expenditure to demolish and remove a swimming pool from a property that you intend to rent out, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), as a maintenance or repair of the property? | A1: No. | Q2: Will the expenditure to demolish and removing of a swimming pool from a property that you intend to rent out, form part of the cost base of the property for Capital Gains Tax (CGT) purposes under section 110-25? | A2: Yes.

Relevant facts and circumstances: You own a property (the Property) that you intend to rent out. The Property has a swimming pool (the pool), that is partly above ground and partially dug into the ground and has pool fencing for safety. The pool does not have a functioning filter system and has become unstable and filled with polluted water. You intend to remove the pool and restore the area for the property to be tenantable. You may fill the hole created after the removal of the pool with dirt and do landscaping in future.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 section 108-60 | Income Tax Assessment Act 1997 section 108-70 | Income Tax Assessment Act 1997 section 110-25

Reasons for decision: Summary: Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 . You will not be restoring the pool to its previous efficiency. You will be removing it entirely. This is a capital expenditure and not a repair and therefore not deductible. The expenses associated with the demolishing, removing and landscaping of the swimming pool are capital expense and will form part of the fourth element of the cost base of a CGT asset. | Detailed Reasoning - Detailed reasoning: Section 8-1 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. | Detailed Reasoning - Repairs: Section 25-10 allows a deduction for the cost of repairs made to premises or depreciating assets used for producing assessable income. However, subsection 25-10(3) denies a deduction for repairs where the expenditure is of a capital nature. An improvement to a property would be capital in nature and therefore not deductible under either section 8-1 or section 25-10. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10. TR 97/23 states that in its context in section 25-10, 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 and contemplates the continued existence of the property. 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. Expenditure incurred for repairs is not deductible under section 25-10 if the expenditure is of a capital nature. TR 97/23 states that expenditure for repairs to property is capital expenditure if the expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety. In your case you intend to remove the pool and will landscape it for safety purposes. This is a capital expenditure and not a repair. You will not be restoring the pool to its previous efficiency. You will be removing it entirely. This expense is therefore not deductible. | Detailed Reasoning - Cost base: As per section 110-25, the cost base of a CGT asset consists of five elements. The fourth element as outlined in subsection 110-25(5) includes capital expenditure you incurred for the purpose or the expected effect of which is to increase or preserve the asset's value. Expenditure incurred for capital improvements to post-CGT land will not be included in the cost base of the land if the capital improvement is considered to be a separate CGT asset. As neither of subsection 108-70(1) nor section 108-60 apply in relation to the swimming pool it is not a separate asset for CGT purposes. The expenses associated with the swimming pool are capital expense and is considered that it will increase and preserve the value of the property. Therefore, it is a capital expense which forms part of the fourth element of the cost base of a CGT asset.