Edited version of private advice

Authorisation Number: 1051568532768

Date of advice: 28 August 2019

Ruling

Subject: Deductions and capital works for the removal of a tree and associated expenses.

Question 1

Are you entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenditure incurred for tree removal and associated repairs and expenses to your rental property?

Answer

Yes

Question 2

Are you entitled to a deduction under sections 8-1 or 25-10 of the ITAA 1997 for expenditure incurred for landscaping?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

1 July 2017

You own a rental property (the property) which you purchased after 20 September 1985.

You hired a licensed plumber to clear a blockage in the property's stormwater and sewer lines. Once the work had been completed the plumber reported both lines were blocked by paperbark roots.

On the recommendation of the plumber, you applied to the local council for a permit to remove the tree. The council requested various reports to justify the removal of the tree.

In line with the council's request, you arranged an onsite consultation and report from an arborist company (the arborist). The arborist's report recommended immediate removal of the tree due to its size and inappropriate proximity to the house and the likelihood of further structural damage.

To satisfy further requirements from the council you obtained a structural report from a Civil Structural Engineers company. The structural report highlighted the roots of the tree were too big to remain inside the small front yard of the property and, in their opinion, had started irreversible damages to the house which would worsen over time and compromise the structural integrity of the house.

Furthermore, another letter of recommendation from the plumber noted the tree roots were very aggressive and as the tree was too close to the house it would cause damage to the foundations and plumbing infrastructure.

After submitting a request for a permit to remove the tree, the council required an additional engineering report to be conducted. You engaged an engineering company to prepare another site inspection. The report confirmed the initial report to remove the tree and remediate the existing damage to the property.

The conditions of the permit enforced by the council were:

·        to make the front of the property legally safe by removing any remaining roots and repaving or concreting the front pathway leading to the house

·        rectifying the existing fence

·        preparation of the front yard for replacement planting

·        suitable species were to be planted to replace the tree

·        the replacement plants were to meet councils urban tree canopy guidelines

·        council was to attend the property to approve the replacement planting.

The tree was removed and repairs and landscaping completed in line with the council conditions.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 40-775

Reasons for decision

Question 1

A deduction is allowed for all losses and outgoings to the extent to which they are incurred in gaining or producing your assessable income except where the outgoings are of a capital, private or domestic nature (section 8-1 of the ITAA 1997). However there are also provisions in the income tax law which deal with specific deductions, including repairs (section 25-10).

Section 25-10(1) of the ITAA 1997 states that expenditure incurred by you for repairs to any premises, or part of premises, plant, machinery, tools or articles held or used by you solely for the purpose of producing assessable income is an allowable deduction. However, a deduction is not allowable if the expenditure is of a capital nature, for example, an improvement.

An expense will generally be deductible if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce your assessable income. The essential character of an expense is a question of fact to be determined by reference to all the circumstances (Taxation Ruling TR 95/33).

Summary

In your case the removal of the tree and the remediation work on the inside and outside of the house are considered repairs as they rectified the damages caused by the operation of natural causes during the passage of time.

Question 2

The cost base of a capital gains tax (CGT) asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

The cost base consists of five elements, as listed in section 110-25 of the ITAA 1997. These elements are added together to calculate the cost base. The 4^th element of the cost base is capital expenditure you incur to increase or preserve the value of the asset such as renovations that are improvements rather than repairs.

Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred for repairs is an allowable deduction. Generally a repair involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Paragraphs 24 and 25 of the ruling discuss where improvements are made to satisfy regulatory requirements.

Section 25-10 allows for works to be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. To repair property improves to some extent the condition it was in immediately before repair; however, a minor or incidental degree of improvement may be done to property and still be a repair.

Where the work amounts to a substantial improvement and results in a greater efficiency of function in the property, the expenditure is not for repairs and is of a capital nature. An improvement involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.

Summary

While general garden maintenance is an allowable deduction where, for example, you pay someone to mow lawns, maintain garden beds or prune trees; landscaping is considered to be an improvement and therefore it is not an allowable deduction as a repair or as a deduction under section 8-1 of the ITAA 1997. In your case the landscaping is not considered a repair under 25-10 of the ITAA 1997.