Private ruling: Rental deductions underpinning
Date of advice: 15 October 2018
Published: December 2018
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

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

Relevant facts and circumstances: You purchased a rental property in State A some years ago. At purchase the house was in good condition. You rented the house for several years and received market rents for this property. In winter of 20XX your tenant emailed your agent to report problems with the house. Your agent reported these problems to you. In spring of 20XX a routine real estate agent inspection of the property documented several cracks in the walls which included photographs for your reference. In autumn of 20YY you received a Special Purpose Building Report which noted “the footings along the front of the building have been undermined and subsided causing severe movement and cracking to both corners.” You sought several quotes from contractors to address this underpinning and selected Company A who underpinned the building before providing an invoice for $X in spring of 20YY.

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. 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 for several years. The property was first available for rent in winter 20XX and was available for rent throughout the underpinning repairs. The need for repairs was occasioned by factors which occurred during the period of income producing. As the work was designed to underpin the foundations, and the essential character of the foundations 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.