Private ruling: Rental property expenses
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the remediation of the retaining walls located at your rental property a repair and is the expenditure incurred deductible? | A1: 

Relevant facts and circumstances: In early 2008 you received an Enforcement Notice from your local council in relation to the retaining walls situated on the land of your rental property. The Enforcement Notice deemed the structure dangerous and required you to consult a professional engineer and carry out the necessary repairs to the retaining walls. The engineer recommended that the retaining walls (or part thereof) are to be removed and reconstructed. The following options were given: · installation of anchors constructed through the wall on a suitable grid, bonded into the weathered rock or stiff clay below the fill, and nominally tensioned; or · construction of a new post and panel wall immediately behind the existing wall. Subsequent to the above, anchoring and retaining wall stabilization was chosen to be done. You have provided a detailed list of the scope of work carried out. In relation to the work undertaken you have provided the following information: · you paid the expenses for all the work undertaken · the wall was in good condition when you built units on the property · the units were built for investment purposes only · the units have always been rented out or available for rent · no work other than remediation of the retaining wall was done at the same time · the wall was originally made from concrete · no new material has been added · the anchors were added to make the wall stable · no insurance or any other payment was received in relation to the work undertaken. As described by the engineer "the objective of the task was to get the retaining walls stable and to do the minimum work possible to achieve a slab surface suitable for cars, without particularly needing to produce a slab that looks good." You have specified the expenses you incurred to remediate the retaining wall during the 2008-09 and 2009-10 financial years. You believe that: · there was no physical advantage from the works carried out on the retaining wall and the appearance of the wall did not change whatsoever · the entirety, being the retaining wall, has not improved from its previous efficiency of function · the work carried out did not alter or change the asset · the costs, in relation to the anchoring and wall stabilization, were incurred to restore and stabilise the structure which had deteriorated over time and the objective was to get the retaining wall stable. In late 2009 the council revoked its Enforcement Notice as the work had been completed to their satisfaction.


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. Subsection 25-10(3) of the ITAA 1997 precludes a deduction for repairs where the expenditure is of a capital nature. The word 'repair' is not defined within the tax legislation. Accordingly, it takes its ordinary meaning. 'Repair' involves a restoration of a thing to a condition it formerly had without changing its character ( W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58. Taxation Ruling TR 97/23 deals with the issue of deductions for repairs. TR 97/23 provides 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 (paragraphs 36-42), or the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair' (paragraphs 44-58). Taxation Ruling TR 97/23 states: Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time. To repair property improves to some extent the condition it was in immediately before 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.' An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. Federal Commissioner of Taxation (1960) 106 CLR 377 at 385). In Case S13 85 ATC 171 ( Cases 13 ), two retaining walls were built on a rental property to prevent soil erosion. Following storm damage, the walls were replaced in a different location with walls that were higher, stronger and of different material. The expenditure incurred for constructing the new walls was held to be an improvement to a fixed capital asset and not repairs. In your case, the anchoring and the stabilization of the retaining walls does not go beyond what is a repair, as the location, height and length of the wall were unchanged. The works carried out represent a repair to a substantial part of the wall as a result of deterioration of the wall over time. Accordingly, the expenditures incurred for remediation of the retaining walls are considered to be repairs and not an improvement of a capital nature.

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