Private ruling: Rental Property Works
Date of advice: 18 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: A2: No

Relevant facts and circumstances: You are a shareholder in a rental property which has been rented for many years. You had to effect emergency repairs to your rental property to stop subsidence at the rear of the building. None of the work was covered by insurance. The work consisted of: ● Supply and install drainage provisions ● Supply and install stormwater pits ● Supply and install downpipe ● Supply and install stormwater pipe ● Route stormwater pipe into basement carpark ● Demolish and reconstruct retaining walls ● Demolish and reconstruct rear concrete paths

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Summary: Repairs 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, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. TR 97/23 indicates 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, or ● the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or ● the work is an initial repair. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. 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. It is acknowledged in TR 97/23 that 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. However, 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. Capital works Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997). Demolishing costs Demolishing work is capital in nature and not a repair. Therefore no deduction is allowable under section 25-10 of the ITAA 1997. Subsection 43-70(2) of the ITAA 1997 excludes certain expenditure from 'construction expenditure'. Expenditure on demolishing existing structures is so excluded (paragraph 43-70(2)(b) of the ITAA 1997). Therefore no deduction is allowable under Division 43 of the ITAA 1997 for the associated costs. No other provision is relevant in relation to the demolishing costs, therefore no deduction is allowable.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions. | Issue 1 Question 1: Are you entitled to a repairs deduction for the work carried out on your rental property to replace existing drainage, downpipes, stormwater pipes and pits? | Issue 2 Question 1: Are you entitled to a deduction for demolition work on your rental property?