Private ruling: Rental property expenses
Published: November 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for replacing sections of the driveway of your commercial rental property? | A1: Yes.

Relevant facts and circumstances: You have owned a commercial rental property that has been rented for a number of years. You undertook work to replace sections of the driveway in stages. Due to rainfall and general wear and tear over the years the driveway had deteriorated to the point where it had become hazardous to both pedestrians and motor vehicles for the tenants and customers. In the first stage you replaced the damaged concreted slab that leads to a roller door with new concrete. You later replaced an adjacent section of the driveway made of concrete and asphalt eliminating pot holes and uneven surface with new concrete. The work done was to repair the damage and restore it to a smooth and level driveway. You have provided copies of invoices for the work completed.

Relevant legislative provisions: Income Tax Assessment Act 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 Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, 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 repair is an initial repair · 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'. 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. An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1961) 106 CLR 377 at 385). 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' | Detailed Reasoning - Initial repair: The work undertaken is not considered to be an initial repair. | Detailed Reasoning - Repair or improvement: 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. Paragraph 16 of TR 97/23 states that to repair property, improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. 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 concrete and asphalt sections of the driveway of your commercial rental property had deteriorated and become hazardous. You replaced the concrete and asphalt sections with new concrete. It is accepted that replacing the sections of the driveway with new concrete constitutes a repair as the work carried out did no more than restore the driveway to its original function and there would not be considered an improvement, nor is it an entirety, as it has renewed a part of the property, being the driveway. Therefore, you are entitled to a deduction for the cost of replacing sections of the driveway of your commercial rental property under section 25-10 of the ITAA 1997.

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