Private ruling: Rental property maintenance and expenses
Date of advice: 1 June 2016
Published: July 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a repairs deduction for replacing the guttering, tree removal and stump grinding? | A1: Yes. | Q2: Are you entitled to a capital works deduction for the following: • exterior paving • soak wells, limestone paving, paving slabs for verge, limestone block supply and installation, reconstruction of retaining walls, removal of soil and replacement with mulch • replacing flyscreens, the shower screen and the vanity? | A2: Yes. | Q3: Are you entitled to claim a deduction for the decline in value of the letterbox? | A3: Yes. | Q4: Are you entitled to claim a deduction for the purpose of eligible environmental protection activity for asbestos removal? | A4: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 40-25 | Income Tax Assessment Act 1997 Section 40-30 | Income Tax Assessment Act 1997 Section 40-755 | Income Tax Assessment Act 1997 Section 43-10

Reasons for decision: Summary: You are not entitled to an immediate deduction for all of the work on your rental property. The work undertaken to remove and replace the guttering, and tree removal and stump grinding is considered to be deductible repairs. The provision of the exterior paving, soak wells, paving slabs limestone blocks, reconstruction of retaining walls and removal and replacement of soil with mulch, paving, vanity unit, flyscreens and shower screen is considered to be capital expenditure and you are entitled to a capital works deduction. The letterbox is a depreciating asset. The cost of the asbestos removal is allowable as a deduction for the purpose of carrying on environmental protection activities. | Detailed Reasoning - Detailed reasoning: Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs 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 deficiency 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) indicates that expenditure for repairs to property is a capital nature where: • the extent of the work carried out represents a renewal or construction 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. | Detailed Reasoning - Replacement of a subsidiary part or entirety: TR 97/23 paragraph 38 considers that a property is more likely to be an entirety if: • the property is separately identifiable as a principal item of capital equipment; or • the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or • the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or • the thing or structure is a 'unit of property' as that expression is used in depreciation deduction provisions of the income tax law. According to paragraph 39 of the TR 97/23, property is more likely to be a subsidiary part rather than an entirety if: • it is an integral part of some larger item of plant; or • the property is physically, commercially and functionally an inseparable part of something else. In the W Thomas & Co case , which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building. | Detailed Reasoning - Repair or improvement: Paragraph 45 of TR 97/23 distinguishes between a 'repair' and an 'improvement' to property. Paragraph 16 of TR 97/23 states that to repair property, improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. 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. Some of the factors pointing to an improvement rather than a repair are whether: • the modification work has effected an improvement • there is greater efficiency of function of the property • there is an increase in the value of the asset • the expenditure reduces the likelihood of future repairs. In your case, you have removed and replaced the guttering, trees and had the stumps ground. The work carried out to replace the guttering does not constitute a renewal, replacement or reconstruction of the entirety of the building. This work simply replaced a subordinate part of the whole of the building which in turn restored the efficiency of function of the building without changing its character. Accordingly, the replacement of the guttering is considered to be a 'repair' and not an 'improvement' It was necessary to remove the trees in order to carry out maintenance to the retaining walls, and the removal of the trees does no more than enable you to return the property to the state it was in before the problem arose. It is accepted that the work undertaken is not an improvement, does not replace an entirety, is not an initial repair and is restoring the efficiency of function to what was in place prior to the damage. Therefore, you are entitled to a deduction for the above works as they are considered to be repairs. | Detailed Reasoning - Capital works: Section 43-10 of the ITAA 1997 operates generally to provide a deduction for capital expenditure on capital works used to produce assessable income. Capital works includes buildings and structural improvements or an extension, alteration or improvement to a building. A deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. This is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works. A capital works deduction is generally claimed at a rate of 2.5% over 40 years. In your case, the vanity unit, shower screen, fly screens and retaining walls are not deductible as a repair. In addition the reconstruction of the retaining wall using limestone to replace the asbestos piping is considered to be an improvement. However you are entitled to a 2.5% capital works deduction as the retaining wall and vanity form part of the premises and are not plant. The vanity unit, shower screen, fly screens are separately identifiable as principal items of capital equipment and the cost of replacing them is capital in nature. | Detailed Reasoning - Retaining walls: You have removed the damaged asbestos piping and reconstructed the retaining walls using limestone. It is considered that the reconstruction work undertaken constitutes an improvement and consequently you are not entitled to an outright repair deduction for all the expenses incurred. You are entitled to include the costs of the reconstruction work as capital works. | Detailed Reasoning - Decline in value: Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997). In your case, the letterbox is a depreciating asset. Therefore you are entitled to a deduction for the decline in value of the letterbox. The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it for a taxable purpose during the income year in which the deduction is available. | Detailed Reasoning - Removal of asbestos: Section 40-755 of the ITAA 1997 allows a deduction for expenditure, including expenditure of a capital nature, incurred on or after 30 June 2001 by taxpayers for the sole or dominant purpose of carrying on eligible environmental protection activities. These activities are the preventing, fighting or remedying of pollution (which includes contamination of the environment by harmful or such potentially dangerous substances as asbestos) in the circumstances specified in paragraph 40-755(2)(a) of the ITAA 1997. Also included are activities in treating, cleaning up, removing or storing of waste in the circumstances specified in paragraph 40-755(2)(b) of the ITAA 1997. The pollution or waste must be of, on or from a site on which the taxpayer carried on, carries on, or proposes to carry on an activity for the purpose of producing assessable income. A deduction for undertaking environmental protection activities is not allowable for the construction of a building, structure or structural improvement or for an extension, alteration or improvement to a building. In your case, removing the damaged asbestos piping from your rental property that is used to produce assessable income constitutes an eligible environmental protection activity as it remedies an environmental pollutant. The asbestos piping was removed with the sole or dominant purpose of preventing pollution of the site of your income earning activities. Therefore you are entitled to a deduction under section 40-755 of the ITAA 1997 for the expense incurred in removing the asbestos piping from your rental property.

Relevant facts: You are a joint of a property which has been rented for a number of years. You had a tenant who caused substantial damage to the property, and you also undertook various repairs due to the age of the property. The costs you incurred have not been reimbursed by other means. | The gutters were very rusty and had to be replaced. | The garden contained a number of trees which were causing damage to the house, sewerage pipes and also to retaining walls which were made of asbestos piping. | Due to health risks the asbestos piping had to be removed, and this was replaced with limestone material to reconstruct the retaining walls which followed exactly the layout of the asbestos piping. | To enable removal of the asbestos piping and reconstruction of the retaining walls, trees had to be removed and the stumps were ground. | The garden had become overgrown and it was necessary to remove the soil which you replaced with mulch and paving. | The shower screen, flyscreens and vanity had been damaged by the tenant, and were replaced.