Private ruling: Rental Property Repairs
Published: October 2011
Ruling period: 1 July 2010 to 30 June 2011

Ruling: Question and Answer | Are you entitled to a deduction for the costs of re-directing a stormwater drain from your rental property? | No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. In xx you purchased an investment property. The property is one of the oldest buildings in the vicinity. When the property was built it would have been a stand alone and the stormwater would have drained into the adjacent fields. At the time of purchase there were no problems with the stormwater. A legal search of the property did not reveal any potential problems. In xx owners of a neighbouring property subdivided their property. When excavating they discovered that the stormwater drain pipe from the property passed under the fence and discharged underground into their garden. They advised the city council. On xx xx xx you received a letter from the city council hydraulic investigation office requesting you to repair the system; the 'Order to perform works' stated; · Connect the private stormwater installation to an approved system. · All roof areas to be connected to the private stormwater installation. You were advised by the hydraulic investigation officer that a hydraulic engineer be engaged to design a system to accommodate a 20 year storm event. The engineer and a plumbing firm advised the best solution was to negotiate a benefitting easement with a down-hill neighbour and use gravity. This did not go ahead because none of the owners of the neighbouring properties agreed to an easement across their property. In xx xx the engineer was contracted to design a stormwater pump station which included heritage assessment and monitoring due to the age of the site. The cost of the pumping station, attendant works and making good was $xx xx.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 subsection 25-10(3) | Income Tax Assessment Act 1997 Section 43-10 | Income Tax Assessment Act 1997 Section 43-30 | Income Tax Assessment Act 1997 Section 43-75 | Income Tax Assessment Act 1997 Section 43-85 | Income Tax Assessment Act 1997 Section 43-140 Reason for Decision | 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, deductions for repairs, provides that expenditure for repairs is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of the entirety, or the works provide a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair'. An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1960) 106 CLR 377 at 385). | TR 97/23 also examines the question of works ordered by a government authority to satisfy regulatory requirements. The ruling states that these expenses are considered under general principles of deductibility. No deduction is allowed for a capital expense. | The work completed in altering the course of stormwater drainage from your rental property alters both the function and structure of drainage on the property. | Accordingly, the costs incurred are capital in nature and not deductible under section 25-10 of the ITAA 1997.

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, deductions for repairs, provides that expenditure for repairs is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of the entirety, or the works provide a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair'. An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1960) 106 CLR 377 at 385). TR 97/23 also examines the question of works ordered by a government authority to satisfy regulatory requirements. The ruling states that these expenses are considered under general principles of deductibility. No deduction is allowed for a capital expense. The work completed in altering the course of stormwater drainage from your rental property alters both the function and structure of drainage on the property. Accordingly, the costs incurred are capital in nature and not 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.