Compare documents

1 Can you claim a deduction for the repair work completed in your investment property to remedy the stormwater pipe relining and veranda balustrade repair?

1 Yes. This ruling applies for the following period : Year ending 30 June 2XX The scheme commenced on: DD MM 20YY

On DD MM 20YY, you purchased a residential/commercial property located at XXX XXX (the Property). The property had three leases in place at the time of purchase and has continually been rented. The property has a real estate agent managing X of the leases and you personally manage the shop tenant. You do not have a personal relationship with any of the tenants. The property is rented at a rate that is within the market band of rent. The property has been vacant when you did major renovations from 20YY and 20YY and in between finding new tenants after old tenants moves out. Sometimes you would keep it vacant for a few weeks if you needed to do repairs. Once the repairs are completed you would lease them out again. You have not used the property personally in the last X years. Circumstances leading to the repair The property is a residential investment that has been continuously rented to tenants. Overtime, it developed issues including: Blocked sewer and stormwater pipes due to shifted terracotta joints and rotten veranda balustrading and palings, creating a safety risk.

You received a work request from the tenant saying several palings were falling off so you patched them up yourself to make it safe, however once the tenant moved out you had it properly repaired. The Work Undertaken The work undertaken was trenchless pipe relining (cured-in-place lining) on two damaged sections of the existing terracotta pipes: One continuous XX-metre section of stormwater pipe. One continuous XX-metre section of sewer pipe. Only these damaged sections were relined (identified via CCTV inspection showing cracks, offsets, root intrusion, or blockages) not the entire stormwater or sewer pipe runs, and no undamaged sections were treated. When originally acquired the pipes were functional, the current damage in these sections arose gradually from long-term use, ground movement, tree roots, and wear during rental periods. No modifications were done during the repair. The work restored the original function (watertight drainage and wastewater conveyance) without changing the pipes' location, capacity, or character.

The new work has no substantial advantages over the original. The repair restores basic efficiency and prevents leaks/blockages, any minor incidental benefits such as smoother flow or increased durability are inherent to the modern relining method and necessary due to the unavailability of original jointed terracotta repair methods and current building standards. Materials used: A flexible felt liner impregnated with epoxy resin (fibreglass-reinforced), inserted into the existing terracotta pipes and cured in place to form a new seamless internal lining bonded to the original pipe (one continuous liner per section). No other work was undertaken at the same time, no improvements, extensions, digging, or treatment of undamaged pipe sections. Veranda balustrading The items repaired are the timber balustrade (railings) on the upper-level veranda/balcony of the property, consisting of vertical palings (infill), top handrail, bottom rail, supporting posts, and protective paint finish. These railings are used for safety (preventing falls from the elevated veranda) and form part of the external structure serving the upper units/common access areas.

The railings were originally made from/consisted of treated timber (palings, top and bottom rails, supported by timber posts), installed/replaced during renovations in approximately 20YY, with a protective painted finish which had deteriorated and faded over time. The veranda and railings serve rented units and common areas, and have been exposed to weathering, moisture, and normal deterioration over approximately XX years of rental use. The veranda balustrading was partially replaced, retaining all existing posts while replacing the top and bottom rails and all palings (around 90% of the balustrade) with the same type of timber. The works were carried out to restore the property to a safe and serviceable condition. No new systems, extensions, or improvements beyond the original state were made. The Work Undertaken The work undertaken was partial replacement of deteriorated sections of the timber balustrade on the veranda/balcony, along with protective repainting of the entire balustrade. Specifically: The rotten, warped, and dangerous vertical palings (infill), top handrail, and bottom rail were removed and replaced. The original supporting posts were retained and reused.

Only the damaged/deteriorated timber components were replaced - not the entire balustrade or supporting structure. When originally installed/replaced in approximately 20YY, the timber components were in new/good condition with a protective painted finish. The current deterioration rotting, warping, safety issues, and paint peeling/fading arose gradually from long-term exposure to weather, moisture, and sunlight. No modifications were done during the repair, the replacement used the same timber sizes, style, and design; the single green paint restored protection and a tidy, uniform appearance practical restoration. no substantial change in character or added features. The new work has no advantages over the original. Materials used: Treated timber palings, top and bottom rails (same dimensions and profile as original); exterior-grade paint. no other work was undertaken at the same time (e.g., no extensions, structural changes by the same contractor. The repairs, including; •                Repair of the terracotta stormwater pipes by relining method. •                Reline from boundary trap shaft upstream to the PVC.

•                Install Liner down the boundary trap shaft and cut 2 junctions. •                Cleaning and televising of the stormwater. •                Balcony balustrade reconstruction, replaced top and bottom rails and all palings same type of timber used. You have supplied the invoices: All invoices have been paid by you. Total cost of repairs - $XXX You will not receive any insurance or other type of payment for the items repaired.

Income Tax Assessment Act 1997 section 25-10

Summary You can claim the expenses listed for repairing the stormwater pipe and veranda balustrade that occurred to your investment property to restore the property to its former condition. These expenses restored the efficiency and function to the property without changing is character or improving the appearance of the property. Detailed reasoning 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 does not allow a deduction for repairs where the expenditure is of a capital nature. Expenditure will be of a capital nature where it is incurred is for reconstruction of an entirety or repairs undertaken to remedy defects, damage or deterioration in existence when the premises were acquired. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and circumstances in which expenditure incurred for repairs is an allowable deduction. We refer to the following:

Paragraph 15 explains that a repair for the most part is occasional and partial. A repair merely replaces a part of something that is already there and has become worn out or dilapidated. Work carried out can fairly be described as a 'repair' if done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time. 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 the income producing use of the property or to defects that emerge suddenly during that time. Paragraph 17 advises that in determining whether work done to property constitutes 'repairs', it is more significant to consider whether the work restores the efficiency of function of the property without changing its character than it is to consider whether the appearance, form, state or condition of the property is exactly restored.

Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls. However, expenses which are capital, or of a capital nature are not deductible as repairs or maintenance. Application to your circumstances The repair expenses for the stormwater pipe and veranda balustrade that occurred to your investment property to remediate the damage and deterioration, that occurred whilst the property was used for income producing purposes. The works undertaken restored the function of the property without changing its character. Furthermore, these expenses were not defined as capital expenditure, and you are entitled to a deduction under section 25-10 of the ITAA 1997.