Private ruling: Rental property expenses
Published: May 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for your share of the cost for the demolition and removal of the swimming pool at your rental property? | A1: No. | Q2: Are you entitled to a capital works deduction for your share of the cost of the demolition and removal of the swimming pool at your rental property? | A2: No.

Relevant facts and circumstances: You are a co-owner of a residential rental property. While the property was rented severe weather, including heavy rainfall damaged a swimming pool. The damage was caused by flood water washing under the pool which caused the pool to collapse. As a result the pool and associated equipment was rendered useless and was demolished and removed. You then had the hole filled in and covered in turf. You consequently lost rental income because of this. The event was not covered by insurance.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 40-25 | Income Tax Assessment Act 1997 Section 43-10

Reasons for decision: Detailed Reasoning - Immediate Deduction: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature. Non-capital expenditure incurred on repairs to plant or premises held or used for the production of assessable income is specifically made deductible under section 25-10 of the ITAA 1997. However, the removal of the swimming pool does not qualify as a repair for the purposes of that section as the work does not remedy or make good defects in, or damage to, or deterioration (in a mechanical or physical sense) of, the rental property. A repair contemplates the continued existence of the property (paragraph 13 of Taxation Ruling TR 97/23). In your case, the badly damaged swimming pool on your rental property was removed. The expenditure incurred in removing a swimming pool from a residential investment property is not deductible under the general deduction provision of section 8-1 of the ITAA 1997 as it is of a capital nature, and there are no other provisions of the ITAA 1997 under which a deduction for the expense is allowable. Deductions for capital expenditure on assets associated with residential rental properties may be available under either: (a) Division 40 of the ITAA 1997 (for depreciating assets); or (b) Division 43 of the ITAA 1997 (for capital works). | Detailed Reasoning - Depreciating asset: A 'depreciating asset' is an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used. In your case, it is not considered that the removal of the damaged swimming pool can be considered as a depreciating asset, and so you are not entitled to a decline in value deduction for the costs of demolition and removal of the swimming pool. | Detailed Reasoning - Capital works: Division 43 provides a deduction for construction expenditure on capital works (including buildings) used for residential accommodation if the construction of the capital works commenced after 17 July 1985 and the capital works are used to produce assessable income. The rate of deduction is 2.5% of the capital expenditure able to be deducted over 40 years. Division 43 applies to capital works that are buildings or structural improvements and to extensions, alterations or improvements to those buildings or structural improvements. In your case the removal of the swimming pool is not considered to be a capital works expense, as it is neither, a building, structural improvement or an extension. Nor is it an alteration or improvement to a building or structural improvement. Therefore, you are not entitled to a capital works deduction under Division 43 for the cost of the removal of the swimming pool. Construction expenditure which specifically cannot be claimed includes expenditure on landscaping, earthworks that are permanent, can be economically maintained and are not integral to the installation or construction of a structure. (rental properties guide 2012 page 21), therefore the backfilling of the hole for the swimming pool and laying of turf is not able to be claimed under Division 43.