Is this a repair or capital cost? Sinking house

I recently incurred a $12k cost for concrete chemical injection to underpin "lift" the front slab of my investment property due to major structural cracking and sinking of the slab.

Purchased in 2007 and lived in until 2012 then turned into investment property.
Repaired in 2017.

As per below case I would say the entire $12k is a repair so should be able to claim the full amount as a deduction. Does anyone agree with this?

Is it possible to get a ruling from the ATO before I submit my tax return?

Cheers

Thanks to Mikelivingthedream I found this on the forum

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.

 

Yep, it's easy to get a Private Ruling.
Putting aside the nature of the work, how you claim it will depend upon the timing. The onus will be on you to prove that all was well when you moved out of the property and the problem occurred while you were renting out the property.
Scott

 

Could be a repair unless it was sinking when you purchased - but even then it could still be a repair if it had been getting worse.

Speak to your accountant about whether you should do a PBR application or not.

 

Reliance on a forum view wont avoid penalties for being reckless if the ATO subjects the issue to review. It could well be a repair and I agree with Terrys concern regarding a initial repair which would prevent a deduction being claimed.

Personal tax advice specific to your circumstances may be simple and demonstrates the benefit of having a tax adviser. If its a brief issue the answer may be quite simple. I dont see the need for a private ruling for something clear. When its arguable each way then I agree. This issue isnt one of those issues. I suspect that cost and issue can be avoided. If I sought a private ruling for every decision I made I would never get anything done.

 

We had a client a few years ago in the same situation. They were able to prove that the subsidence happened after they started renting the place out, so there was no issue there about it possibly being an 'initial repair'. But it was a big claim, and the ATO queried it.
In their case, the fix involved digging beneath the foundations and putting a concrete pad down to support a corner of the house. The ATO deemed that because they were introducing a 'new structural element' they could not claim the work as a repair. The only bit they allowed the client to claim as a repair was some internal plaster repairs and paint.
There were no penalties or anything like that, but they were understandably a bit glum.

 

Had exact issue with the Loganlea property.
1. Back corner of kitchen had dropped off, needed a new steel pillar and jacking up.
2. Deck was is disrepair and cost $10k to be redone.

Tenants moved in before deck was done.
Regardless the condition of the deck was existing prior to the property being leased so obviously capital in nature even though the repairs were not an upgrade/variation or an improvement on the initial structure

 

I rarely apply for a private ruling. If I give a client a sign off that there position is reasonably arguable I am happy to push that position.

The main problem with private rulings is that you will get a correct response to your question.

If you ask the wrong question,or if your question does not cover all angles that could apply then you can still "get" a ruling but it will not protect you.

I see this a lot with financial planners. They are instructed to distribute a certain product to their clients and the private ruling is used as a marketing ploy to encourage clients to bypass their tax advisor and they simply look to the financial product advisor only.

The short answer is that a tax advisors opinion in writing is sufficient protection.

 

As @Ross Forrester and @Terry_w have said it really does depend.

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 ). 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).

If the underpinning goes beyond restoring the property to its original state and alters the character of the property. Accordingly the underpinning work may be a capital improvement rather than a repair and therefore is not deductible in the year of income.

Best to find out when the damage was done and the nature of the works performed.

 

Yes the ATO adopt the view in the safe harbour position that if a taxpayer seeks reasonable advice from a lawyer / tax adviser then the taxpayer may avoid penalties and interest or at least see it remitted to a lesser level. If the adviser is diligent its also not likely to be a case of negligent advice under PI just because the ATO dont agree.

This protection doesnt extend to wilful advice to peddle schemes or activities (eg split lloan arrangements, Part IVA scheme) given by practitioners.