Private ruling: Rental repairs
Date of advice: 12 November 2015
Published: November 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for your portion of the costs incurred for the removal of a water tank from your jointly owned rental property and associated repairs? | A1: Yes.

Relevant facts and circumstances: The house and water tank were built after 20 September 1985. You moved in and it became your permanent place of residence. Sometime later you moved out of this residence and started to use it for income producing purposes. It has been used for this purpose since except brief periods between tenants. Over time the water tank developed cracks that ultimately led to the tank no longer being able to hold water. And during recent years the cracks became more pronounced leading to safety concerns for the tenants. In addition to the safety concerns the cracks in the tank led to leaks that, during heavy showers and storms, led to erosion of the driveway which became unusable to tenants. Tenants who have resided in this property have expressed concern at the safety of the tank. Early in the XXXX financial year you paid to have the tank removed from the premises and repaired the driveway so it could be used again. The removal of the water tank and work listed above cost $XX.

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, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable. According to paragraph 13 the word 'repairs' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repairs (being defects, damage or deterioration in a physical sense) and contemplates the continued existence of the property. Expenditure associated with the removal of an asset from your rental property would not ordinarily be considered a repair for the purposes of section 25-10 of the ITAA 1997. However, in your case the removal of the water tank can be linked to the damage and repairs done as a result of the deteriorated condition of the water tank which caused the erosion of the driveway. The work was done for safety reasons and it is considered that this was done in conjunction with remedying and making good the damage to the property, therefore, it is a repair for the purposes of section 25-10 of the ITAA1997. In addition, the expenditure you incurred is not considered to be capital in nature. The removal of the damaged water tank might appear to an improvement by resolving the safety issue and any potential future damage to the driveway and other parts of the property, the expenditure incurred in the removal of the water tank does no more than remove the problem so as to put you in the same position you were in before the water tank started to deteriorate and posing a threat to the property and your tenants. Accordingly, as you used the property solely for income producing purposes in the year the expenditure was incurred, you are entitled to a deduction under section 25-10 of the ITAA 1997 for your portion of the expenses incurred. | Detailed Reasoning - Further issues for you to consider: According to subdivision 40-D of the ITAA 1997 when you stop holding a depreciating asset a balancing adjustment event occurs. The amount of the balancing adjustment is calculated by comparing the asset's termination value with it adjustable value. The termination value of a depreciating asset that is disposed of is the amount or value received or receivable upon disposal. The adjustable value of an asset is the opening adjustable value (the adjustable value form the end of the previous income year) plus any second element costs, less its decline in value for the year up to the time the asset was disposed of. If the termination value of the depreciating asset is less than its adjustable value, the difference is deductible in the income year in which the balancing adjustment event occurred.