Private ruling: rental repairs
Date of advice: 7 April 2016
Published: May 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Question and Answer | Is a deduction allowable for the cost of rectifying damage to a wall of a building used as a rental property? | Yes

Relevant facts and circumstances: The Trust receives income from renting out a commercial building. The Trust purchased the building about twenty years ago. Movement in the wall of the building became evident a few years ago. Various experts visited the site and established that the wall was in danger of collapsing due to a construction by another entity in close proximity of the wall. Professionals prepared designs for the damaged wall to be rectified. The original wall was constructed with a certain type of bricks outside and concrete blocks on the inside. The wall including foundations was demolished and replaced with another brick wall of similar nature.

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

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, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 is entitled Income tax: deductions for repairs. It 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 a taxpayer's 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 | Detailed Reasoning - Applying the law to the facts: The Trust has been deriving rental income from the building for a number of years. Movement in a wall of the building became evident a few years ago. Expenditure has been incurred progressively by the Trust to rectify the damage caused to the wall which was in danger of collapsing. The work took place in the relevant income years. The damaged wall was originally constructed with a certain type of bricks outside and concrete blocks on the inside. The wall including foundations was demolished and replaced with another brick wall of similar nature. There has been no greater efficiency or function after the work was completed. As the work involves a restoration to its former condition without changing its character, the costs incurred by the Trust are for a repair and are not capital in nature. The Trust is therefore entitled to deduction for the expenditure incurred under section 25-10 of the ITAA 1997.