Capital Works or Repairs Expense

Discussion in 'Accounting & Tax' started by SPB, 24th Sep, 2017.

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  1. SPB

    SPB New Member

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    I purchased a residential investment property in July 2016 and now need to get some of the house stumps replaced. It may only be a couple of the stumps and not all of them. Would this be considered a repair and therefore a deductible expense or would it be considered a capital works expense. Would the timing of the work affect either as well ie only owning the property for 18 months. Thanks in advance.
     
  2. Mike A

    Mike A Accountant

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    Improvement or repair

    Case V2 88 ATC 107; AAT Case 4012 (1988) concerned a taxpayer who wished to claim a deduction for the cost of the partial underpinning of a rental property caused by excessive drying of the subsoil. A footing was replaced with three columns. A masonry wall that buttressed the columns and enclosed the back corner of the carport was also added. It was found that the foundations were restored to their former efficiency in function without the essential character of the foundations being altered. The repairs to the foundations, including the replacement of a footing with columns were not capital in nature as they did not change the nature and character of the building but simply remedied a defect. As such they were deductible as repairs. By contrast the masonry wall was held to perform a new function, changed the appearance of the building and was an addition to the building. It was considered to be a capital improvement, not a repair.

    Initial repair

    TR 97/23 goes on to explain that expenditure incurred on an initial repair after a property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10.

    An initial repair is found if the defect existed at the time of acquisition of a property and if the defect did not arise from the operations of the person who incurs the expenditure. It is immaterial whether the person knew of the defect or otherwise at the time of purchase.

    Initial repair costs can be subject to apportionment if any part of the expense that remedies deterioration arises from the holding of the property for income-producing purposes after it was acquired. However no dissection or apportionment is required if the defect and expenditure are wholly attributable to the holding of the property after it was acquired. If repair costs are attributable either to damage that occurs during the holding of the property for income purposes or to defects that emerge suddenly and mature during that time, a deduction is allowable.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Sounds like an initial repair and not deductible
     
  4. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Unless a specific event such as exceptional rain., flooding etc caused recent damage I would agree that its a initial repair and thus not deductible.
     

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