Private ruling: Rental repairs
Date of advice: 11 November 2015
Published: November 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for your share of the 'repair work' undertaken on your rental property? | A1: Yes. | Q2: Are you entitled to a deduction for the expenses incurred rendering your rental property? | A2: No.

Relevant facts and circumstances: You and your spouse own a rental property. A crack was noticed and there were slight problems with the doors. You arranged for a structural engineers report and the conclusion was that only cosmetic remedial works were appropriate at that stage. After the property was let, the ground sunk a lot further. A builder investigated the problem and advised that the foundations of the house were sinking at one end resulting in a crack across the middle of the house. The 'repair work' undertaken included: • Evacuating the walls to rock and pouring a series of reinforced concrete footings to the portion of the house that had sunk • Dig to rock beneath the house and replace the piers with posts to the portion of the house that had sunk • Completely strip the bricks from the half of the house that had sunk • Slowly raise the floor back to the horizontal • Re-brick the walls from ground to roofline • Repair damaged walls inside the house The builder also rendered and painted the external walls. The house was not previously rendered, but was naked brick.

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

Reasons for decision: Summary: Section 25-10 of the Income Tax Assessment Act (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 does not allow a deduction for repairs where the expenditure is of a capital nature. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant. Taxation Ruling 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. Paragraph 77 of TR 97/23 states that 77. A deduction is allowable under section 25-10 if, when the repair expenditure is incurred in a year of income, the property is held, etc., by a taxpayer for income purposes: (a) even though the property has previously been held, etc., by the taxpayer for non-income purposes; and (b) even though some or all of the defects, damage or deterioration arise from, or are attributable to, the taxpayer's holding, etc., of the property before its holding, etc., for income purposes; and (c) provided that the repair expenditure is not capital expenditure. Case V2 88 ATC 107; AAT Case 4012 (1988) 19 ATR 3038 concerned partial underpinning of a rental property caused by excessive drying of the subsoil. It was found that the foundations were restored to their former efficiency in function without the essential character of the foundations being altered. The repairs to the foundations were not capital in nature, as they did not change the nature and character of the building and as such were deductible as repairs. In your case, you bought the property a number of years ago and the property has been income- producing. The need for repairs was occasioned by factors that occurred during the period of income production. Although the 'repair work' required was extensive, it was only undertaken to the portion of the property that had sunk and restored it to its original condition. The work is considered to be a repair and not capital in nature, and consequently the expenditure incurred is deductible as per section 25-10 of the ITAA 1997. | Detailed Reasoning - Rendering: 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. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life. In your case, the rendering of the building is considered to be an improvement. The rendering will improve the cosmetics of the building which can reasonably be expected to enhance its saleability and market value. Therefore you are not entitled to a repairs deduction under section 25-10 of the ITAA 1997. | Detailed Reasoning - Additional information: You will be entitled to a 2.5% capital works deduction in relation to your share of the cost of the rendering.