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Another "Initial Repair" or immediate deduction question....

Discussion in 'Accounting & Tax' started by Propagate, 18th Mar, 2016.

  1. Propagate

    Propagate Well-Known Member

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    So, we purchased and renovated a "cheapy" before Christmas, (turning out to be not that cheap just quietly).

    First tenant moved in at the end of January 2016.

    Beginning of March they take a bath and then get onto the PM to say the bath isn't holding water.

    Plumber comes out, the drain seal at the bath plug hole is shot, water is leaking between the bath and drain, onto the floor.

    The bath is built into a tiled hob. Plumber puts a hole in the wall in the room behind to see under the bath and finds no coupler between the drain and waste pipe. Says he needs to break out the concrete under the bath to expose more pipe, put a coupler on then a new bath drain and seal.

    I give the go ahead as there's not really any other option.

    He goes back to do the work yesterday, as soon as he starts messing about with the drain the bottom falls out of the bath! It's a metal bath and the drain hole was rusted, it has now broken out so the bath is totally useless and needs replacing. Being built into a hob, with the tiles over the bath lip, we now need to remove 2 or 3 rows of tiles all round, remove the lower part of the wall sheet, break out the bath, rebuild the hob frame to suit new bath, install new bath, patch up and waterproof the walls and re-tile, (sounds expensive).

    The bath has obviously been rusting away slowly for years, so initially I'd assume it to be an initial repair for tax purposes, BUT, seeing as it just catastrophically failed during the repair and now needs a much bigger repair, I'm wondering if that classifies as a repair in the general sense and can be immediately deducted?

    The bath and tiles will be replaced so as to be as close to what is currently there as possible, so there's no "upgrade" going on, so there shouldn't be an issue with it not being a maintenance/repair classification it's just whether I can immediately deduct it or being that it's only a couple of months into the tenancy whether it needs to go against the cost base.

    Cheers.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You've held it for 4 months now. Sounds like it could be a repair to me.
     
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  3. Propagate

    Propagate Well-Known Member

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    Thanks @Terry_w hadn't thought of it that way, was thinking in terms of how long the tenant has been in. Settled end of November, so yes, 4 months. Was available for rent from early December but didn't secure a tenant until end of Jan.
     
  4. Depreciator

    Depreciator Moderator Staff Member

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    If asked, this is what the ATO would focus on:

    'The bath has obviously been rusting away slowly for years, so initially I'd assume it to be an initial repair for tax purposes,...'

    They may not be all that sympathetic about the fact that the repair ended up being bigger than initially anticipated. It's a bit like somebody tackling a bit of existing termite damage in a recently acquired house and discovering that half the house was about to come down.
     
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  5. Propagate

    Propagate Well-Known Member

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    Hmm.... I figured that would be a way of looking at it. Wonder if it's worth asking for a private ruling? @Depreciator
     
  6. Depreciator

    Depreciator Moderator Staff Member

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    Have a chat to your accountant first. They might slip it through as a repair.
     
  7. Propagate

    Propagate Well-Known Member

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    Not a fan of slipping things through if it's not cut & dry. I'd rather take the hit now and recoup anything possible on selling than have to go through the rigmarole of trying to justify it should I get audited down the track.
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I would side with Depreciators view on this. There was likely a defect that was not evident when purchased. Such defects may take time to become apparent (like termites. concrete cancer and other slow degenerative problems)

    I do also agree on Terry position in some cases the defect may well arise after use and be reasonably arguable. But in such instances I would expect that tenant wear and tear or damage is a feature rather than deterioration.

    Slipping it through ? That's a taxpayer risk. As a tax agent I need to advise on what provides the lowest risk. I would say initial repair.
     
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  9. Rob G

    Rob G Well-Known Member

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    Cost of rectifying defects existing when the property was acquired is a capital cost of acquisition.

    Even subsequent damage caused by the existing defect is questionable and depends upon individual circumstances.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The question now becomes was the deduct in existance at the time of acquisition?

    You may need to call an expert Rust specialist (named Rusty?) as a witness.
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The tax ruling doesnt requre evidence of existence just its occurence. The taxpayer knowedge isnt a factor. Most taxpayers associate deductions with substantiation which requres knowledge.Not capital expenditure. NO better example than a QS report.
     
  12. Rob G

    Rob G Well-Known Member

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    A QS report is an administrative concession where it is unreasonable for the purchaser of a property to be able to discover the original construction cost. You must use the actual construction cost if you can get it.

    Purchasing an asset for full value while unaware of latent defects does not permit a deduction for rectification, W. Thomas & Co. In other words, for initial repairs, knowledge of the fault or defect is irrelevant at law. It is either an initial repair or it is not ... a question of fact.
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    True. I realise that comment could be easily misconstrued. My comment was made in respect of the fact that it occurs - Not when.

    If you buy a property with a sewer defect several months later then its hard going to convince anyone its not a initial repair. The taxpayer doesnt have to be aware of the defect at time of purchase. Ditto rust - Rust may not be outwardly evident but when the roof collapses its VERY evident.

    One problem too with sewers is plumbers dont lay clay pipe so a full replacement would be capex anyway even if a small segment had recent evidence of new roots etc.