1 Can you claim a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the costs you incurred in relation to the gas leaks?
1 Yes. Question 2 Can you claim a deduction under section 25-10 of the ITAA 1997 for the costs you incurred to replace the water pipe? Answer 2 No. Question 3 Are you eligible to claim a capital works deduction at a rate of 2.5% under Division 43 of the ITAA 1997, in relation to the costs you incurred to replace the water pipe? Answer 3 Yes. This ruling applies for the following period : Year ended 30 June 20YY The scheme commenced on: 1 July 20YY
You have a rental property. You have rented out this property for many years. You are the sole owner of the property. You engaged the services of Company A to undertake plumbing and gas pipe work at the property. Gas pipe work In MM/YYYY, work was done to fix gas leaks. A leak was found on the regulator vent of the gas pipe. There was also a leak in the gas line. The leak in the gas line was unable to be located and was suspected to be in a section of pipe that was inaccessible. To fix the leak this section was replaced and re-routed. The total cost to fix the gas leaks was $X. Water pipe replacement In MM/YYYY, work was undertaken due to a burst water pipe. The invoice included the following work done: • the investigation of the burst pipe found the pipe to be extremely rusted and not able to be repaired, • supply and installation of 25 mm poly water line, • dug 300 mm deep trench from water meter to house, • installation of a new water meter assembly with a garden tap and pressure limiting valve. • backfill of trench.
A different material was used for the replacement water pipe as galvanised pipes are no longer available because they may contain lead. The total cost of the work in relation to the water leak was $X.
Income Tax Assessment Act 1997 section 25-10 Income Tax Assessment Act 1997 subsection 43-25(1) Income Tax Assessment Act 1997 Division 43 Income Tax Assessment Act 1997 subsection 43-20(3) Income Tax Assessment Act 1997 subsection 43-25(1)
Rental property deductions for repairs Section 25-10 of the 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. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction. The term 'repair' means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. 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. However, replacement or substantial reconstruction of an entirety, as distinct from subsidiary parts of the whole, is a capital expense.
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 of the ITAA 1997. 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. Costs incurred in relation to initial repairs are not deductible under section 25-10 of the ITAA 1997. Activities undertaken to remedy some defect or damage to, or deterioration of, property will be an initial repair if the defect, damage or deterioration: • existed when the property was purchased; and • did not arise from the operations of the taxpayer who incurs the expenditure.
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 of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. The term 'entirety' is used by the courts in repair cases to refer to something 'separately identifiable as a principal item of capital equipment' ( Lindsay v FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201). Paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered to be a subsidiary part rather than the entirety. In the case of WG Thomas & Co Pty Ltd v FC of T
(1965) 115 CLR 58; (1965) 14 ATD 78, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building. Expenditure for work to property is capital expenditure if the expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal or replacement in the sense of a reconstruction of the entirety. A factory drainage system comprising of an underground system of concrete stormwater drains was considered to constitute an entirety in Case G5 (1995) 7 TBRD 29. Subsection 25-10(3) of the ITAA 1997 excludes capital expenditure from being a repair deduction. However, a capital works deduction may be available for capital expenditure. Capital works deduction Where expenditure is not immediately deductible under section 25-10 of the ITAA 1997 because of its capital nature, the expenses may be deductible under Division 43 of the ITAA 1997.
Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements addresses a number of matters that are relevant in determining entitlement to, and the amount of, a deduction under Division 43 of the ITAA 1997 in respect of expenditure on the construction of assessable income producing buildings and other capital works. It also identifies certain expenses that are included in construction expenditure. Paragraph 7 of TR 97/25 outlines the three categories of capital works in respect of section 43-20 of the ITAA 1997 as: • Buildings or extensions, alterations, or improvements to buildings • Structural improvements or extensions, alterations, or improvements to structural improvements; and • Environment protection earthworks. Examples of structural improvements are set out in subsection 43-20(3) of the ITAA 1997 which include, amongst other things, sealed roads, sealed driveways, pipelines, retaining walls and fences.
Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a rental property is 2.5% over a period of 40 years. A capital works deduction can only be made after the completion of the capital works. Application to your situation We have considered the nature of the activities that are the subject of this ruling to determine the taxation treatment of the costs you incurred in relation to those activities as follows: Gas pipe work You have rented out the property for many years, and your tenants recently reported leaking gas. Tests were done and the investigations found leaks in the regulator vent and a section of the gas line. In accordance with the principles contained in Taxation Ruling TR 97/23 the activities undertaken in relation to the gas piping constituted a repair for the following reasons: • The issues with the gas piping had arisen many years after you acquired the property. Therefore, the activities are not viewed as initial repairs.
• The activities undertaken in relation to the gas piping merely restored the efficiency of function of the piping and therefore are not considered to constitute an improvement to the piping. • Not all of the gas piping required attention, only the regulator vent and a section of the pipe. As all of the gas piping is the entirety, and only part of it was replaced, the work done was not the replacement of an entirety. Therefore, you can claim an immediate deduction under section 25-10 of the ITAA 1997 for the cost of the activities undertaken in relation to the property's gas piping. Water pipe replacement Investigation of the burst water pipe identified that the original galvanised water pipe was extremely rusted. Repairs to the pipe were not possible and a replacement water line was required. This involved digging a 300mm deep trench from the water meter, the replacement of the water meter and the installation of the new poly water line connecting to the house. The issue arose many years after you acquired the property so the remedial work is not an initial repair.
A different material was used for the replacement water pipe as galvanised pipes are no longer available because they may contain lead. Although a different material was used, it is not considered to have improved the efficiency of function of the pipe. Therefore, it is not considered to be an improvement. However, in accordance with the principles contained in Taxation Ruling TR 97/23 the activities undertaken in relation to the replacement of the water pipe do not constitute a repair. The water pipe is a separately identifiable capital item with its own function and is an entirety in itself. Therefore, the removal and replacement of the galvanised pipe was the replacement of an entirety which is a capital expense. Accordingly, you cannot claim a deduction for this cost as a repair under section 25-10 of the ITAA 1997. However, you can claim a capital works deduction under Division 43 of the ITAA 1997 at the deduction rate of 2.5% of $X in the 20YY income year, and each of the following 39 income years for a total of 40 years while the property is genuinely available for rent.