Private ruling: Rental deductions
Date of advice: 8 November 2023
Published: 18 December 2023
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 2022

Ruling: Q1: Is your share of the restumping of the rental property a repair and therefore deductable under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You and your spouse purchased the property in a prior year. You and your spouse own the rental property in equal shares (i.e. 50-50). When you purchased the property, it was a rental property and you continued to rent it out. You noticed damage to the property when the tenants moved out several months after the property was purchased. You were required to have the property restumped due to excessive water around the foundation of stumps. The original stumps were red gum timber stumps. The stumps were replaced with concrete stumps. The work was necessary as the floor was sinking. Half the stumps were replaced. The restumping work commenced in the same month and was finished several weeks later. The property was not tenanted while the work was being carried out. You did not get a building inspection done on the property prior to purchase. You did not make an insurance claim for the restumping as you are of the opinion it is a repair and repairs are not covered by insurance.

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) provides for a deduction for expenses incurred for repairs to premises that are held or used solely for income producing purposes. However, a deduction for capital expenditure is not allowed under this section (subsection 25-10(3) of the ITAA 1997). Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10 of the ITAA 1997. Paragraph 15 of this ruling explains that a repair 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. A repair is work done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) over a period. 'Initial repairs' arise where a taxpayer makes good defects to property which existed at the time the property was acquired. Expenditure incurred for initial repairs represents the cost of improving the item from the condition it was in at the time of acquiring it rather than repairing ordinary wear and tear occurring while the item was owned and used by the taxpayer for income producing purposes. If the defect or damage to or deterioration of the property existed at the time of acquisition of the property, and if it did not arise from the income producing activities of the person who incurs the expenditure, expenditure in remedying the situation is capital expenditure. | Detailed Reasoning - Application to your circumstances: The Commissioner considers that works in regard to the re-stumping of the property constitutes an 'initial repair' based on the following factors: You and your spouse purchased a rental property in a prior year. You and your spouse noticed damage to the property when the tenant moved out of the property a few months later. The floor was sinking, and the stumps needed to be replaced as they had excess water damage done to them. The original stumps were made out of red gum timber, and they were replaced with concrete stumps. The damage to the property would have been present when you and your spouse purchased the property. You only owned the property for a few months prior to finding the damage to the floor and stumps. The defects in the property were present when you purchased the property, they did not arise out of normal wear and tear. Accordingly, remedying the damage to the floor and stumps is an initial repair and the expenditure incurred is capital in nature. Therefore, no deduction is allowed under section 25-10 of the ITAA 1997 for the cost of the work carried out on the property.