Private ruling: underpinning rental property foundations
Published: March 2012
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to claim the expenses of underpinning your rental property as a repair? | A1: 


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-10

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature. Section 25-10 of the 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: o the extent of the work carried out represents a renewal or reconstruction of the entirety, or o the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or o the work is an initial repair. In your case the work undertaken is not an initial repair and does not constitute the renewal or reconstruction of an entirety. Consideration does however need to be given to whether any of the work undertaken is an improvement. Paragraph 45 of TR 97/23 states that to distinguish between a 'repair' and an 'improvement' to property, one needs to consider the effect that the work done on the property has on its efficiency of function. If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property. In your case, you are the owner of a rental property that was first available for rent several years ago. The foundations of two adjacent rooms were underpinned and it is considered that you have restored the property to its original condition, function and appearance. The addition of the underpinning restores the property to its former appearance without changing its character. The expenditure incurred in doing this is deductible under section 25-10 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You are the owner of a property which has been rented for several years, since you purchased it. The property is a single fronted double brick terrace, and is over X years old. | Since purchase, you have had some minor cracking in walls repaired by plastering. | Over three years ago, the tenants advised you that the cracks had reappeared and were rapidly worsening, particularly in a part of the house. | The cracking then deteriorated to the extent that your tenants vacated, as the house had become uninhabitable. | You engaged a structural engineering firm to review the cause of the severe cracking in the walls, and advise on a solution. | They provided a design report for underpinning, and you engaged a builder to undertake the work. | Repairs were completed and the house was again available for rent. | The detailed work specification provided by your builder and relevant extract from the builder's contract have been provided.