Private ruling: Rental - deductions (repairs, capital works, interest, borrowing expenses)
Published: August 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for 25% (your share) of the expenses incurred in respect of the work completed on the retaining wall for your rental property? | A1: Yes.

Relevant facts and circumstances: You own a percentage of a rental property. Your rental property was purchased in 200X and has only ever been used as a rental property. Your rental property was rented out for the entire 2013 financial year. Your rental property was rented whilst the repair took place. The developers originally constructed a retaining wall to ensure your rental property was level. You estimated the retaining wall was constructed 30 years ago. Your tenants installed a reticulation system which has been leaking over several years and has attributed to the deterioration of the blocks used to construct the retaining wall. Your local shire council and a structural engineer advised that the wall needed to be repaired. You repaired Y metres of the Z metre long wall which cost you less than $30,000 in total of which you paid less than $10,000.

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. However, subsection 25-10(3) of the ITAA 1997 denies a deduction for repairs where the expenditure is of a capital nature. | Detailed Reasoning - The meaning of repairs: Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally a repair involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. TR 97/23 explains (at paragraph 16) 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. | Detailed Reasoning - Improvement: While a repair restores the efficiency of the function of the property without changing its character, an improvement goes beyond this and provides a greater efficiency of function in the property. An improvement usually brings the property into a more valuable or desirable form or condition than a repair would and generally changes the character of the property. However, different materials may be used to repair the property, for instance, repairing a property with its modern equivalent. A repair refers to the restoration of efficiency rather than the exact repetition of form and materials previously used. An improvement involves more than merely using a different material, it must also give a better result. | Detailed Reasoning - Application to your circumstances: In your case, you have replaced part of a retaining wall of your rental property. Part of the original retaining wall collapsed as a result of water damage. You have partly owned and rented the property since 2007, and the retaining wall was in good condition at the time of purchase of the property. You have rented the property since 2007 and it is accepted that the need for repair occurred during the period of the rental. The removal and replacement of part of the collapsed section of the retaining wall will simply restore the property to the condition it was in prior to the damage occurring. Thus, the work to be undertaken is considered to be a repair and you are entitled to a deduction for 25% (your share) of the expenditure under section 25-10 of the ITAA 1997.