Private ruling: Rental property repairs
Published: October 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to claim a deduction for repairs, for the following work carried out on your rental property, to repair the damage caused by the subsidisation of the land? • Underpinning the rental property • Replacement of damaged drainage pipes • Replacement of pavers which were removed to allow access to the area for underpinning and reconnection of stormwater drainpipe • Replacement of rear pergola • Landscaping of the yard following repair work • Repair and painting of cracked internal walls, cornices and ceilings • Waterproofing and re-tiling of bathroom where the floor was dug up to locate drainage leaks • Replacement of bathroom fittings; taps, shower rose and towel rack | A1: Yes.

Relevant facts and circumstances: You purchased an investment property which was tenanted at the time of purchase. A building inspection was carried out and the building was considered to be in good to fair condition with no major structural concerns. The tenants vacated the property a few years later. You inspected the house prior to re-letting and found the following issues: • The laundry door could not be opened • The dining room sliding door was not square • The rear and northern side of the building (garage side) had subsided, as a result of soil movement. You contacted an underpinner for a quote to correct the damage. You contacted your insurer to see whether your insurance policy would cover the damage. A period of time passed before a decision was made that it would not be covered. The property remained vacant during this time. You hired the services of an engineer to provide a report on how to rectify the damage from the soil movement. The following work was undertaken to correct the damage, based on plumber and engineers' reports: • Underpinning of the rear and garage side of the house. • Removal of rear patio concrete and rear pergola, which was attached to the house, to access and replace damaged drainage pipes, as a result of the subsidence. • The subsequent replacement of the rear patio concrete. • The subsequent replacement of the rear pergola with a patio kit. • The original structure was unable to be re-used due to damage caused by the subsidence of the house. The same roof material has been used on the replacement pergola; however the supports used are different, due to the availability of materials. The roof and floor area are the same as the original structure. • Lifting of pavers to allow for underpinning and reconnection of downpipe storm water drain. • The subsequent replacement of the original pavers. • Bathroom floor dug up to locate drainage leaks. • The subsequent waterproofing and retiling of the bathroom. • The bathroom had been previously tiled. The replacement tiles were similar - a different size had to be used as the original tile size was unavailable and had no match. • Some of the bathroom fixtures, including taps, shower rose and towel racks, were replaced. The towel racks had to be replaced due to damage during the removal. The replacement fixtures were similar to the originals ones. • Landscaping to bring the yard to the original condition after the completion of repair work. • Repair to cracks in internal walls, cornices and ceilings caused by the subsidence and its rectification. • The subsequent painting of these areas. These costs were incurred to restore the property to the original condition, or nearest to as was possible due to the availability of materials. The repair of the property involved multiple trips to the site to meet with plumbers, engineers, tilers, concreters, the back-hoe operator. You also undertook other maintenance and non-trade work on these visits. While undergoing the work, the property was not able to be let out. The property was listed with a real estate agent after the work was completed and new tenants were found within the week.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 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 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. Taxation Ruling TR 97/23 states that 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. 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. | Detailed Reasoning - Underpinning: 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, the property has been tenanted since you purchased it. At the time of purchase, the property was structurally sound. The need for repairs was identified after the tenants vacated the property a few years later. Although the work was extensive, only the affected parts of the foundations were underpinned in order to restore it to its original condition. Given the essential character of the foundations were not altered, the work is therefore considered to be a repair and not capital in nature. Accordingly, the expenditure is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Replacement of damaged drainage pipes: You were incurred significant expenses in replacing drainage pipes that were damaged by the subsidisation of the property. You were required to remove the rear patio concrete and pergola in order to gain access to the damaged pipes. Subsequently, you sought the services of a concreter to replace the rear patio concrete. This work was carried out to restore the drainage pipes to their original function without changing its character. Accordingly, the expenditure incurred is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Replacement of pavers: You were required to lift the pavers to allow for the underpinning and reconnection of the down piping to the stormwater drain, which you subsequently replaced following the completion of the work. The work carried out to remove and replace the pavement was to restore the area to its previous function without changing its character. Accordingly, the expenditure incurred is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Replacement of rear pergola: You were required to remove the rear pergola, which you subsequently replaced with a patio kit. The removal and replacement of the original pergola was necessitated by the damage caused by the subsidisation of the property and the need to allow access to the damaged area to take correctional action. The original pergola was unable to be reinstated because of the damage caused by the subsidisation. 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. Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'. The replacement of the roof is therefore not capital. In your case, you were required to replace the rear pergola that was attached to the house. Unlike a bathroom or a kitchen, the pergola in itself is not considered to be an entirety, because it offers no separate functionality without the rest of the house. Additionally, the replacement pergola was constructed in the same area as the original structure had been, with the same roof and floor area being utilised, and the same roofing materials used. Although the supports are different to the original structure, due to the availability of the materials, the replacement of the pergola has not altered the character or functionality of the property. Accordingly, the expenditure incurred is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Landscaping: You incurred landscaping expenses to bring the affected yard area back to its original condition, before the extensive repair work was carried out. Accordingly, the expenditure is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Repair walls/painting/waterproofing and re-flooring of bathroom: You were required to carry out repairs to reinstate the bathroom floor where access was required to locate drainage leakages to repair the damage that resulted from the subsidisation of the property. In addition some of the internal walls, cornices and ceilings were cracked and required repair and painting due to the subsidisation of the property and its subsequent repair. The work carried out was to restore parts of the floor, walls and ceilings to its previous function without changing its character. Accordingly, the expenditure incurred is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Bathroom fixtures/fittings: You were required to replace the bathroom towel racks, which were damaged following work to locate and repair drainage leaks. You also replaced the bathroom taps and shower rose. The original fixtures were replaced with similar materials, due to the unavailability of the original fixtures. Accordingly, the expenditure incurred is deductible under section 25-10 of the ITAA 1997. As your property is used for income producing purposes and the work undertaken is not an initial repair, is not a replacement of an entirety and is not an improvement, a deduction is allowable under section 25-10 of the ITAA 1997.