Private ruling: Rental property - repairs
Published: September 2014
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the costs of replacing the piping in your drainage system be deductible as a repair under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: You own a rental property. You have held and derived rental income from this property for several years. In the 2013/2014 year parts of the drainage system was damaged due to damage from tree roots. You paid $x to replace the piping in your drainage system from the existing fixtures in the property to the back fence line. The drainage system from the back fence line to the Council's main sewer system was not replaced and was left as was. Also included in the above amount were expenses of for excavation, backfilling and the removing of excess soil.

Relevant legislative provisions: Income Tax Assessment 1997 section 25-10

Reasons for decision: Summary: Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to a property which is used solely to produce assessable income. However, subsection 25-10(3) of the ITAA 1997 denies a deduction for repairs where the expenditure is of a capital nature. Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally a repair involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. Paragraph 16 of TR 97/23 explains 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. While a repair restores the efficiency of the function of a property without changing its character, an improvement goes beyond this and provides a greater efficiency of function in the property. An improvement usually brings the property into a more valuable or desirable form or condition than a repair would and generally changes the character of the property. Where the extent of the work carried out represents a renewal or reconstruction of an entirety, rather than a replacement of subsidiary parts of a whole the expenditure will be capital in nature and not deductible under section 25-10 of the ITAA 1997. An entirety is defined as something separately identifiable as a principal item of capital equipment ( Lindsay v. FC of T (1961) 106 CLR 377). Paragraph 38 of TR 97/23 provides the Commissioner's view on what factors will determine whether the property repaired is an entirety: a) The property is separately identifiable as a principal item of capital equipment b) The thing or structure is an integral part, but on apart, of entire premises and is capable of providing a useful function without regard to any other part of the premises c) The thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves, or d) The thing is a unit of property as that expression is used in the capital allowances deductions provision of the income law. | Detailed Reasoning - Application to your circumstances: We consider in your circumstances that the work done will restore sewerage drainage of the property to its original state, any improvement would be incidental. Further we do not consider that the work carried out represents a reconstruction of an entirety of a separately identifiable capital asset. On application of the factors listed in paragraph 38 of TR 97/23 it is considered that the drainage system is incapable of providing any useful function without the remainder of the property and the drainage system of the property includes the existing fixtures which were not replaced and the pipes from the fence line to the councils main sewer line. Therefore the expenses incurred will be deductible as a repair under section 25-10 of the ITAA 1997.