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

Ruling: Question and answer | Are you entitled to a deduction for the cost of underpinning works to your rental property? | Yes.

Relevant facts and circumstances: You own the rental property. In order to rectify the damage caused by the movement of the foundations, underpinning works were required to be completed at the rental property. You incurred expenses in relation to the underpinning works.

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 Income tax: deductions for repairs (TR 97/23) explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: • 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', or • the work is an initial repair. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. It is acknowledged in TR 97/23 that 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. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. In Case V2 88 ATC 107; AAT Case 4012 (1988); ATR 3038, the taxpayer purchased a block of flats, the vendor having strengthened the foundations of part of the building as a condition of sale. Five years later, the problem recurred and the taxpayer replaced part of the footings with columns buttressed by a masonry wall (which also enclosed the rear corner of a carport under the flats). The AAT held that, apart from the erection of the buttressed wall, the work was repairs. The foundations had simply been restored to their former efficiency of function without losing their essential character. The buttressed wall, however, performed a function not performed by the old foundations and was not a repair (it also altered the appearance of the building). The costs of the work were apportioned between deductible repair costs and non-deductible capital expenditure. | Detailed Reasoning - Application to your circumstances: In your case, you incurred expenses relating to underpinning works to rectify the damage caused by movement of the foundations of your rental property. It is considered that your case is similar to Case V2 88 ATC 107; AAT Case 4012 (1988); ATR 3038 in that the foundations have simply been restored to their former efficiency of function without losing their essential character. Therefore, you are entitled to a deduction for the cost of underpinning works to your rental property.