Private ruling: Rental property expenses
Published: May 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Question and answer | Are you entitled to a deduction for the replacement of a fence and retaining wall? | No.

Relevant facts and circumstances: You own a rental property. This property was fenced on the left and right hand sides and at the rear of the property. The fence at the rear of the property sits on a shared 2 metre retaining wall which has had a swimming pool installed by the neighbours. You replaced the wood fence with a metal fence and you replaced the wooden retaining wall with cement. Your neighbour paid half the cost involved.

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 a rental property. 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. The term 'repairs' is not defined in section 25-10 of the ITAA 1997 therefore it is necessary to look at its ordinary meaning. Paragraph 13 of Taxation Ruling TR 97/23 states the following: The work 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. At paragraph 44 TR 97/23 goes on to state: In the case of a 'repair', broadly speaking, the work restores the efficiency of function of the property without changing its character. Improvement or repair When work is done to restore or fix a damaged item, we need to determine if the work undertaken is a repair or an improvement. Repairs generally restore the item to its former function and efficiency whereas improvements increase an items functionality and/or efficiency. TR 97/23 states that an improvement 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. If the work carried out on and item amounts to an improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. The fence and wall were made of wood and you replaced the fence with metal and the wall with cement. The work carried out on the fence and wall did more than just restoring it to its previous condition and the work carried out constitutes an improvement. You are not entitled to a deduction under section 25-10.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.