Question: My investment property has been showing some cracks, so I got it looked at and it turns out that there’s quite a bit of subsidence, and it’s been recommended that I get some underpinning work done. I’ve got a couple of quotes and it looks like it’s going to cost me at least $20,000. 

My question is whether I can call a job that costs this much a ‘repair’ for tax purposes, or will ATO tell me that it’s an improvement? Therefore, can I call it a deductible expense, or will I have to depreciate? Given how much this is going to cost me, I’d like to make it as tax efficient as possible. 

Answer: What seems like a simple question does not, in this case, have a simple answer. The ATO has specifically issued an Interpretive Decision (ATO ID 2001/30) relating to underpinning the foundations of a rental property. The facts of this case were that the ground beneath the rental property subsided. 

The interesting thing in this case was that the taxpayer underpinned the entire foundation by adding a further foundation under the existing foundation. Section 25-10 allows a deduction for expenditure incurred for “repairs” to an investment property. The word repair is not defined in the legislation and therefore takes it ordinary meaning. “Repair” involves restoration to a condition it formerly had without changing its character. 

In the case above it was argued that in underpinning the entire foundations, the tax payer changed the nature of the income producing property and therefore the underpinning work was capital in nature and not deductible in the year it was incurred. 

It may be argued that if the underpinning that is described in the question is specific, and restores the property to a condition it formerly had, the underpinning in this case may be regarded as a repair and be deducted in the year it occurred. 

  • Answer provided by Dom Cosentino, Kennedy & Co Chartered Accountants (kennedy.com.au)