1 Are you entitled to an immediate income tax deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the partial relevelling and partial restumping of your rental property?
1 Yes. Question 2 Are you entitled to an immediate income tax deduction under section 25-10 of the ITAA 1997 for additional stumps that were added to your rental property? Answer 2 No. This ruling applies for the following period : Year ended 30 June 20YY The scheme commenced on: DD MM 20YY
In 20YY, you acquired the property located at the property. The property was more than 40 years old when purchased and in mediocre condition. No building report was obtained. The property was rented out immediately after settlement. Since acquisition, it has been consistently rented, except or brief periods between leases. The property was managed by a real estate agency. In 20YY, you replaced the old stumps with new concrete stumps, which allowed for releveling of the floor. Since 20YY, the timber floor gradually unsettled once more. In early 20YY, you received a quote for releveling the house. The restumping contractor advised that adding additional concrete stumps was required, citing that the load along the internal load-bearing wall was excessive. You accepted this recommendation and authorised the releveling work along with the installation of the additional stumps. On DD MM 20YY, you were invoiced by Company A. • The releveling cost included replacement of some concrete stumps installed in 2013. • The installation of the additional stumps was to correct and make safe the internal load.
The property was not rented after the works were completed but subsequently sold later in MM 20YY.
Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 25-10
Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the circumstances in which deductions for repairs are allowable. TR 97/23 states the following regarding what is considered a repair: 13. The word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. 14. Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property.
15. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Works can fairly be described as 'repairs' if they are 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. 16. To repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10.
Initial repairs are of a capital nature and therefore not deductible under section 25-10. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration: • existed at the time of acquisition of the property and • did not arise from the operations of the person who incurs the expenditure. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs. If the defect or damage to or deterioration of the property existed at the time of acquisition of the property, and if it did not arise from the income producing activities of the person who incurs the expenditure, expenditure in remedying the situation is capital expenditure. Application to your circumstances
In 20YY, you replaced old stumps with new concrete stumps, which allowed for releveling of the floor. Since 20YY, the timber floor gradually unsettled once more. In early 20YY, you received a quote for the releveling of the house and the replacement of some stumps previously replaced in 20YY. The restumping contractor advised that adding 11 additional concrete stumps was required, citing that the load along the internal load-bearing wall was excessive. You accepted this recommendation and authorised the releveling work, replacement stumps and the installation of the additional stumps. Section 25-10 of the ITAA 1997 states you can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income.
The partial re-levelled and partial re-stumping were completed to remediate the damage and deterioration to the property and restore it to the condition from when the stumps were installed in 20YY. The repairs did not improve or change the character of the stumps as the repair included a like for like replacement; therefore, those expenses are deductible under section 25-10 of the ITAA 1997. As the property is solely used for the purpose of producing assessable income, you can claim a deduction for the relevelling and stump repairs under section 25-10 of the ITAA 1997. The need for additional stumps to support the load bearing wall was present when you purchased the property, they did not arise out of normal wear and tear nor were they a result of the tenant's occupation of the property. It is immaterial whether at the time of acquisition you were aware of the condition of the property, including its need for repair. Therefore, no deduction is allowed under section 25-10 of the ITAA 1997 for the cost of the additional stumps on the property.