Edited version of private ruling

Authorisation Number: 1011588949010

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Ruling

Subject: Rental property expenses incurred during improvements and repairs

1. Are you entitled to a deduction for your share of rental property expenses incurred during the period repairs and improvements are being carried out on the property?

Yes.

2. Are you entitled to include the period the repairs and improvements are being carried out on the property when calculating your capital works deduction?

Yes.

3. Are you entitled to a deduction for the decline in value of the fixtures, fittings and appliances used in the rental property during the period repairs and improvements are being carried out on the property?

Yes.

4. Are you entitled to a deduction for your share of the additional expenses you incurred to remove, store and insure some fixtures, fittings and appliances during the period repairs and improvements are being carried out on the property?

Yes.

This ruling applies for the following period<s>:

1 July 2009 to 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are a part owner of a rental property.

The property is used exclusively as a rental property and has been used in this manner for more than ten years.

The body corporate of the complex where the property is located resolved to perform substantial building improvements, renovations and repairs to the common property as well as the individual units themselves.

The major contractor carrying out the building works disallowed general access to the complex during the construction period of approximately seven months.

Upon completion of the works, the property will be used in the same manner as it was prior to commencement of the works with an expectantly higher rental return.

During the period of construction, you continue to incur expenses including council rates, body corporate levies, insurance and electricity.

You also incurred additional expenses including removal, storage and insurance as some of the furniture and fittings and appliances were placed in storage for their protection during the construction period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 43-165

Reasons for decision

Detailed reasoning

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital or private in nature (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Rental property expenses

In Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production.

It follows from Steele that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances:

· the interest is not incurred too soon, is not preliminary to the income earning activities and is not a prelude to those activities

· the interest is not private or domestic

· the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost

· the interest is incurred with one end in view, the gaining or producing of assessable income, and

· continuing efforts are undertaken in pursuit of that end.

While Steele dealt with the issue of interest on land intended to be developed, the principles can be equally applied to other types of expenditure including council rates, body corporate levies, insurance and electricity incurred during a period repairs and improvements are being carried out to a rental property.

In your case, the expenses (council rates, body corporate levies, insurance and electricity) you incurred on the rental property during the construction period are not considered preliminary or to have been incurred too soon as they were incurred for the sole purpose of producing assessable income. In addition, there is no private or domestic purpose for holding the property as the property is used for the sole purpose of producing assessable income.

While the income stream from the property has ceased for approximately seven months while the repairs and improvements are undertaken, this period is not considered to have been so long that the necessary connection between the outgoings and the assessable income is lost.

As the property will be made available for rental immediately following the completion of the works, it is accepted that continuing efforts have been undertaken in the pursuit of gaining or producing assessable income.

As such, you are entitled to a deduction under section 8-1 of the ITAA 1997 for your share of the rental property expenses incurred during the period repairs and improvements are being carried out on the property.

Capital works - temporary cessation of use

Division 43 of the ITAA 1997 provides deductions for certain capital expenditure on assessable income producing buildings and other capital works, and provides the rules for working out those deductions. This Division applies to capital works being a building, or an extension, alteration or improvement to a building begun in Australia after 21 August 1979.

Capital works are taken to be used, or available for use, for a particular use or in a particular manner if the use of those capital works for that purpose or in that manner temporarily ceases because of the making of repairs or improvements to the capital works (section 43-165 of the ITAA 1997).

As you intend to use the property for the same purpose as you used it before the work to repair and improvement it commenced, and you intend to make it available for rental immediately following the completion of the work, the property is taken to be used or available for that purpose during the period repairs and improvements are being carried out on the property.

Therefore, you are entitled to include the period the repairs and improvements are being carried out on the property when calculating your capital works deduction.

Decline in value

You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year, reduced to the extent your use of the asset is for other than a taxable purpose (section 40-25 of the ITAA 1997). A taxable purpose includes the purpose of producing assessable income.

In your case, you removed some of the fixtures, fittings and appliances from the property and placed them in storage while the repairs and improvements were carried out. These items were not used for any other purpose during this period.

As you held these assets for a taxable purpose, you are entitled to a deduction for their decline in value during the period repairs and improvements are being carried out on the property.

Additional expenses - removal, storage and insurance costs

Section 8-1 of the ITAA 1997 deals with general deductions and allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

The expenses incurred to remove, store and insure fixtures, fittings and appliances while the work was carried out are considered to have the essential character of income-producing expenses and are incidental and relevant to the gaining of your rental income. Therefore, you are entitled to a deduction for your share of the removal, storage and insurance costs under section 8-1 of the ITAA 1997.

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