Private ruling: Deduction for remediation of the pool structure foundations at a rental property.
Date of advice: 27 September 2018
Published: November 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is expenditure incurred in relation to the remediation of the pool structure foundations located at the taxpayer’s rental property a repair and is the expenditure incurred an allowable deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: The property was purchased on X 20XX (settlement date – X 20XX) for $X plus purchase costs. It was equally owned by Y and Z. It was first available for rent on X 20XX and was rented from X 20XX to X 20XX. The property was used privately for the period X 20XX to X 20XX. In X 20XX the property was advertised for rent. Whilst waiting to secure a tenant, some minor repairs were conducted at the property. From late X 20XX the property was rented for $X per week. The property was available for rent for the entire financial year ended 30 June 20XX. V managed the rental property. No relationship existed with the tenants of the property. The remediation work related to the slippage of the downslope part of the pool structure foundation which was first noticed by the taxpayers in late 20XX. Upon noticing the slippage, the owners engaged with expert geotechnical and structural engineering consultants in X 20XX to investigate, assess and quantify the current condition, recommending remedial actions to secure and prevent ongoing slippage. An expert report was provided to the client detailing the remediation design options dated X 20XX. The report suggests that the pool foundations and ground preparations were not correctly undertaken during initial construction of the property which only presented with the recent movement of the pool structure foundation. The building and pool structure foundation were approved by the local council at time of construction and before the property was purchased by the taxpayer (approximately X years ago). Over time, the entire pool foundations and structure had a slow and progressive circular failure slippage in the downward direction of the slope. The taxpayers concluded that expert advice was required regarding the repairs to be conducted. T was then engaged to manage the detailed design and construction of the remediation works which commenced on X 20XX and were completed by X 20XX. A ‘Completion Report’ was provided upon finalisation which detailed the work carried out. The work was funded by the owners and no insurance or any other payments were received (or due) in relation to the works undertaken. Works were undertaken and costs were incurred to: 1. re-stabilise the structure 2. correct deterioration and movement and 3. reduce potential safety risks. The property was rented for the duration of the restoration works. The expert report and completion of works cost $X.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 subsection 43-20(2)

Reasons for decision: Summary: Subsection 25-10(1) of the ITAA 1997 allows a deduction for the cost of repairs to premises used for solely income producing purposes. Deductions of a capital nature are disallowed under subsection 25-10(3) of the ITAA 1997. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable to damage that occurs during the income producing use of the property. Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a 'repair' involves a restoration of a thing to a condition and efficiency it formerly had. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time (paragraph 15 of TR 97/23). If the works are a substantial improvement they are not a repair and not deductible under section 25-10 of the ITAA 1997 (paragraph 16 of TR 97/23). It was stated that the slippage of the downslope part of the pool structure foundation was first noticed by the taxpayers in late 2016. The report from the expert stated that the vertical deformation of the pool structure foundation is likely the result of settlement of the footing in the uncontrolled fill. If the pool was founded in the fill then movement through settlement/sliding is almost certain, and reflects a similar failure mode of the original house footings which were also founded in the fill. It was also suggested in the report that the pool structure foundations and ground preparations were not correctly undertaken during initial construction of the property which only presented with the recent movement of the pool structure foundation. In your case, the work undertaken was to alleviate a structural problem causing the pool to slip on the downslope part of the structure foundation. The pool itself was not repaired and the structural improvement was made to its structural foundation on which it was built. This was not done by simply repairing any potential cracks or panels of the pool deck. The work was not to repair or replace a part of something or correct something that is already in existence which has become worn out or dilapidated. The work provides a greater efficiency of function to the property as it improves its usage due to being structurally better than it was when it was first installed, as well as drainage piping being inserted to the capping beam. The work was undertaken to rectify initial building defects as the pool was not built correctly based on its location and surrounds. The works undertaken were beyond that of a repair as the structure foundation was strengthened to a degree significantly greater than that upon initially being built. The use of reinforcing and drainage pipes in this case is considered an improvement as it is integral to the pool structure foundations. The circumstances presented are similar to those of Case V108 88 ATC 694; AAT Case 4484 (1988) 19 ATR 3691. The word ‘improvement’ at paragraph 13 in this case referred to the altering of the characteristics of land by some development, not to something which makes the land more valuable. The work carried out on the pool structure foundation is considered to be more accurately characterised as a structural improvement rather than a repair or maintenance. Consequently a deduction is not allowable under either section 25-10 or section 8-1 of the ITAA 1997. A capital works deduction under subsection 43-20(2) of the ITAA 1997 over 40 years would be allowed in relation to the structural improvement. It should be noted that the capital works write-off deduction is allowable only for the period the property is rented or is genuinely available for rent.