Private ruling: Rental property repairs
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to a deduction for the expenses incurred in replacing a section of a retaining wall and fence at your rental property? | A1: Yes.

Relevant facts and circumstances: You acquired a rental property a number of years ago. The property has been an income producing property since its acquisition. The rental property has a retaining wall along one of its boundaries. The retaining wall is made of brick. The wall has a wooden paling fence with uprights built into the wall. At the time of acquisition there were no stress cracks or leaning in the wall and the fence was sound. The wall has subsequently developed cracks, an inward lean and bricks have fallen out. You sought legal and engineering advice. Following an inspection by the local council, urgent approval was given to fix the retaining wall. The council required that the wall be constructed in accordance with the engineering advice. The back half of the wall was subsequently replaced. The front section of the wall didn't need replacing and it is believed that this section is newer than the replaced part. The original fence on top of the back half of the retaining wall was replaced with a similar fence, however metal posts were used rather than the original wooden posts. Also, concrete bricks replaced the clay bricks that were used originally. When the new wall was built it was a requirement by the council and the engineer that footings were added which the old wall didn't have.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10. Reasons for decision | Summary | The expenses you incurred to replace a section of the wall and fence at your rental property are an allowable deduction as they satisfy the requirements of section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning | Section 25-10 of the 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. | What is a 'repair'? | The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. Paragraphs 13 -16 of Taxation Ruling TR 97/23 specifically deal with the 'ordinary meaning of repairs'. The word 'repair' 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. | TR 97/23 refers to the case of W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR; (1965) 14 ATD 78; 1965 9 AITR 710, in which 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. | Capital nature | TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: | · the work is an initial repair; or | · the extent of the work carried out represents a renewal or reconstruction of the entirety; or | · the work results in an improvement in the property rather than a repair. | An initial repair | According to paragraph 125 of the TR 97/23, a repair after acquisition of property is an 'initial repair' if the repair was due when the property was acquired, in the sense that there was a need for repair to restore or maintain the property's efficiency of function. In other words, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended. | You acquired the property a number of years ago and it has been used as an income producing property since acquisition. At the time of acquisition there were no stress cracks nor leaning in the retaining wall and the fence was sound and apparently all was in good order. | Therefore, the replacement of the section of the wall is not an initial repair. | Renewal of an entirety | A repair involves a replacement or renewal of a worn-out or dilapidated part of something but not of the whole thing, that is, the entirety. TR 97/23 states: | Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction, as distinguished from repair, is restoration of the entirety. | The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1960) 106 CLR 377; (1960) 12 ATD 197). | You have replaced a portion of the wall along the eastern boundary of your rental property. The entire wall is considered to be an entirety. Therefore you have replaced a subsidiary part of a whole and have not replaced an entirety. | A repair or improvement | Relevant considerations as to whether work carried out constitutes an improvement are given by TR 97/23 (paragraph 124). These are: | · whether or not the thing replaced or renewed was a major and important structure of the property | · whether the work performed did more than meet the need for restoration of efficiency of function, bearing in mind that 'repair' involves a restoration of a thing to a condition it formerly had without changing its character | · whether the thing was replaced with a new or better one, and | · whether the thing has considerable advantages over the old one, including the advantage that it reduces the likelihood of repair bills in the future. | Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant. | If the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using a different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. However, the greater the work enhances the efficient functioning of the property, the more likely it is that the work constitutes an improvement. | The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility under section 25-10 of the ITAA 1997. If the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement. | When the work was carried out on the wall concrete bricks were used instead of clay bricks and metal, replacing the wooden, posts were installed. Additionally, footings were added to the wall. It is considered that these changes do not provide a sufficient degree of improvement. Therefore they are considered to be a repair rather than a replacement. | In your case you have incurred expenses to replace a section of a wall and fence at your rental property. We conclude that the partial replacement of the wall is not an initial repair, the replacement of an entirety, or an improvement. Hence, the replacement of the section of your wall and fence is a 'repair' and therefore the expenditure incurred is deductible under section 25-10 of the ITAA 1997.


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