Private ruling: Rental property expenses
Published: July 2011
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to a deduction for cost incurred in underpinning part of the foundations of your rental property? | A1: Yes | Q2: Are you entitled to claim a deduction for repairs of the following work to be carried out to your rental property? · Supply sub floor and Baltic pine floorboards to the hallway which allowed access to the area for underpinning · Supply plaster board to plaster the hallway and bedroom where cracks were formed from the underpinning · Paint the hallway and bedroom · Repair and paint the render to the façade · Re attach the light switch in second bedroom · Repair the front gate · Repair and reinstate pantry door and handle to the bathroom · Re attach the ducted heating vent to the kitchen kickboard. | A2: Yes

Relevant facts and circumstances: You purchased a home to live in. You had a property inspection report completed which identified minor settlement which had no impact on functionality and no maintenance was required. You lived in the home until you rented the property. The property had the same tenants from when first rented until it was vacated while repairs were undertaken and then was again re-leased. During this time, there was significant movement in the front wall of the property. You had work undertaken to underpin seven positions and lift the walls into position. You have provided a copy of the building permit detailing the front and part side walls of the property requiring underpinning. You then had the following work undertaken: · Supplied sub floor and Baltic pine floorboards to the hallway which allowed access to the area for underpinning · Supplied plaster board to plaster the hallway and bedroom where cracks were formed from the underpinning · Paint the hallway and bedroom · Repair and paint the render to the façade · Re attach the light switch in second bedroom · Repair the front gate · Repair and reinstate pantry door and handle to the bathroom · Re attach the ducted heating vent to the kitchen kickboard. You undertook the work to return the property to its original condition Detailed reasoning Section 25-10 of the Income Tax Assessment Act (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 since 2004. The property was first available for rent in August 2006 and rented until repairs were undertaken. The need for repairs was occasioned by factors which occurred during the period of income production. Although the work was extensive, only part of the foundations was underpinned, that restored it to its original condition. As the essential character of the foundations was not altered, the work is therefore considered to be a repair and not capital in nature, and consequently the expenditure is deductible under section 25-10 of the ITAA 1997. Plastering, painting and flooring You were required to carry out repairs to reinstate the sub floor and floor boards to the hallway area where access was required for the underpinning. In addition the walls to the hallway and a bedroom required plastering and painting along with the façade due to the cracks forming from the underpinning. The work carried out was to restore parts of the floor, walls and façade to its previous function without changing its character. Thus, the expenditure incurred is deductible under section 25-10 of the ITAA 1997. Other repairs You were required to have minor repairs carried out due to wear and tear. They included reattaching a light switch, repair and replacing a new latch to the front gate, repair and reinstate pantry door and handle to bathroom door and re attach ducted heating vent. The expenditure incurred for repairs due to wear and tear are deductible under section 25-10 of the ITAA 1997.



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