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Are the costs incurred for the partial rebuilding of an external protective wall of a rental property deductible repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The costs incurred for the partial rebuilding of an external protective wall are deductible repairs under section 25-10 of the ITAA 1997.

A rental property the taxpayer has owned for 20 years includes an external protective wall.

After a periodical inspection found the wall to be collapsing, approximately 85% of the wall was demolished and rebuilt on its original foundations.

The works included the building of two additional internal buttress walls to offer ongoing structural integrity, and the use of larger blocks of better quality dimensional sandstone. The original wall was not extended in height or length.

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes.

Subsection 25-10 (3) of the ITAA 1997 precludes a deduction for repairs where the expenditure is of a capital nature.

The word 'repair' is not defined within the tax legislation. Accordingly, it takes its ordinary meaning. 'Repair' involves a restoration of a thing to a condition it formerly had without changing its character ( W Thomas & Co v. FC of T (1965) 115 CLR 58; [1965] HCA 54 (the Thomas Case )).

Taxation Ruling TR 97/23 deals with the issue of deductions for repairs.

TR 97/23 provides 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 (paragraphs 36-42), or the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair' (paragraphs 44-58).

An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1960) 106 CLR 377 at 385; [1961] HCA 93).

In Case S13 85 ATC 171, two retaining walls were built on a rental property to prevent soil erosion. Following storm damage, the walls were replaced in a different location with walls that were higher, stronger and of different material. The expenditure incurred for constructing the new walls was held to be an improvement to a fixed capital asset and not repairs.

The taxpayer's external protective wall was the entirety as it was readily identifiable as a separate item of capital equipment.

As the original foundations were retained, and the location and length of the wall were unchanged, the works represented a repair to a substantial part of the wall that had deteriorated by ordinary wear and tear during the passage of time (the Thomas Case ). Also, the marginal enhancements that were introduced in the design and material structure of the wall represented a replacement of something that was already there with its modern equivalent, rather than an improvement to a fixed capital asset ( Morcom & Ors v. Campbell-Johnson & Ors (1955) 3 All ER 264).

Accordingly, the costs incurred by the taxpayer were for a repair and were not capital in nature. The taxpayer is entitled to claim a deduction for the expenditure incurred under section 25-10 of the ITAA 1997.

Date of Amendment Part Comment 20 February 2015 Reasons for Decision Insert medium neutral citation Case references Insert medium neutral citation

Date of Amendment | Part | Comment

20 February 2015 | Reasons for Decision | Insert medium neutral citation

Case references | Insert medium neutral citation