Private ruling: rental property expenses
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for option two in relation to fixing the drainage in your rental property? | A1: Yes

Relevant facts and circumstances: You own a residential investment property. The property is permanently tenanted. You have owned the property for 20 years and it has been tenanted the entire time. The property currently has a storm water drainage problem which causes flooding during heavy rain and needs repair. Specifically, the problem relates to blocked or damaged underground drainage pipes. The plumber advised you that the blocked drainage is due to broken pipes caused by tree roots directly under the neighbouring property's concrete yard and that there is no easy way to repair the underground blocked drain. The plumber has provided you with two options. Option one is that you replace the existing blocked drains by ripping up the concrete yard and replacing it in the neighbouring property. Option two is that you dig a trench and connect new drainage pipes to the storm drain in the back yard. You would prefer undertake option two.


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. 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 deals with the issue of deductions for repairs. TR 97/23 explains (at paragraph 16) that to repair property improves to some extent the condition it was immediately before 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. As the work you intend to carry out under option two is to correct a drainage problem and to restore efficiency of function to the property it is classified as a repair and not capital in nature. You are therefore entitled to an outright deduction under section 25-10 of the ITAA 1997.

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