Issue
Whether expenditure incurred in underpinning the foundations of a rental property is deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)
Decision
The expense incurred in underpinning the foundations is capital in nature and is not deductible under section 25-10 of the ITAA 1997.
Facts
The taxpayer owns a rental property. The ground beneath the rental property subsided. The taxpayer subsequently underpinned the entire foundation by adding a further foundation under the existing foundation.
Reasons For Decision
Section 25-10 of the ITAA 1997 allows a deduction for expenditure incurred for repairs to premises or plant that you held or used solely for the purpose of producing assessable income. 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) 14 ATD 78; (1965) 9 AITR 710). In this context it is restoration of efficiency in function rather than exact repetition of form or material that is significant. Whether or not work done upon a thing is properly described as a repair of that thing is a question of fact and degree.
Expenditure will be on capital account if it is for alterations that go beyond fixing damage accumulated during a taxpayer's use of an asset in producing income (BP Oil Refinery (Bulwer Island) Ltd v. FC of T 92 ATC 4031; (1992) 23 ATR 65 ). Alterations may restore the function of an item and be on revenue accounts, but alterations that change the character of the item will be on capital accounts and not deductible.
In underpinning the entire foundations, the taxpayer inherently changed the nature and character of the income producing property (Case V2 88 ATC 107; AAT Case 4012 (1987) 19 ATR 3038 and ACT Construction Ltd v. Customs & Excise Commissioners [1979] 2 All ER 691). The underpinning goes beyond restoring the property to its original state and alters the character of the property. Accordingly the underpinning work is a capital improvement rather than a repair and therefore is not deductible in the year of income.
Amendment History
Date of amendment Part Comment 14 October 2013 Decision, Reasons for Decision and Case References Format and style changes for consistency Related ATO IDs Inserted related ATO IDs
Date of amendment | Part | Comment
14 October 2013 | Decision, Reasons for Decision and Case References | Format and style changes for consistency
Related ATO IDs | Inserted related ATO IDs