Private ruling: Rental deductions
Date of advice: 24 October 2018
Published: March 2019
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the costs of repairs in a rental property fully deductible as repairs under Section 25-10 of the Income Tax Assessment Act (1997)? | A1: Yes

Relevant facts and circumstances: You purchased the property in State A in autumn 20AA. At the time of purchase, the house was in good condition. You rented the house beginning in spring 20BB and received market rents for this property. In winter 20XX your tenant reported problems with the house. Your agent reported these problems to you. You received an inspection report by a building services contractor which recommended that the storm water line to the house be renewed. In spring 20XX a local plumber performed rectification works to replace the damaged sewer drains. This property was fully rented throughout these repairs.

Relevant legislative provisions: Section 25-10 of the Income Tax Assessment Act (ITAA 1997)

Reasons for decision: Summary: Section 25-10 of the Income Tax Assessment Act (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 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 v. FC of T (1965) 115 CLR 58 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 efficiency in function rather than the exact repetition of form or material that is significant. Taxation Ruling 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. Case V2 88 ATC 107; AAT Case 4012(1988) 19 ATR 3038 concerned partial underpinning of a rental property caused by excessive drying of the subsoil. It was found that the foundations were restored to their former efficiency in function without the essential character of the foundations being altered. The repairs to the foundations were not capital in nature, as they did not change the nature and character of the building and as such were deductible as repairs. In your case, you have owned the property since 20AA. The property was first available for rent in 20BB and was available for rent throughout the repairs. The need for repairs was occasioned by factors which occurred during the period when this property was an income producing asset. As the work was designed to replace and rectify damaged sewer drains, and the essential character of the drainage was not to be altered, the work intended would therefore be considered to be a repair and not capital in nature, and consequently the expenditure is deductible under section 25-10 of the ITAA 1997.