Private ruling: Rental property deduction
Date of advice: 22 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction against rental income for repairs to your rental property? | A1: Yes.

Relevant facts and circumstances: You have a rental property which has been rented June 200X with the exception of when the property was between leases. You were made aware of the deterioration of the building when the property manager was conducting a property inspection. You were provided with photographs of evidence of the deterioration. You made a claim against your insurer, which was subsequently denied in full. You consulted and Engineer for a Structural Inspection Report to ascertain the cause of the deterioration to the property. You contracted a Company to carry out the works to repair the problem as recommended and in accordance with the building plans and permit. The cost of these works was $X

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10

Reasons for decision: Summary: The cost of underpinning and re-blocking on your rental property is regarded as a deductible repair. | Detailed Reasoning - Detailed reasoning: 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, to the extent that the expenditure is not capital in nature. Taxation Ruling 97/23 explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become work out or dilapidated. 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. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. It is acknowledge in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor or incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. In your case, the underpinning work used similar material to what was previously there. The property is restored to its original condition, function and appearance. The work is not regarded as an improvement. The underpinning expenditure incurred is a deductible repair under section 25-10 of the ITAA 1997.