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Ruling

Subject: Rental property expenses

Question 1:

Can you claim a deduction in the 2011-12 financial year for rental property expenses paid in the 2011-12 financial year but incurred in previous years?

Answer:

Yes

Question 2:

Can you claim a deduction for overseas travel expenses incurred to inspect your rental property?

Answer:

Yes

This ruling applies for the following periods:

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

4 April 2010

Relevant facts and circumstances

You purchased a commercial rental property in a foreign country in the 2005-06 financial year. You were a resident of that country at the time of purchasing the property.

The property was rented for two years but has been vacant since. Your property manager has endeavoured to find a tenant however has been unsuccessful.

Since the property became vacant you have incurred expenses relating to the rental property which you have not paid. Interest has also been applied on the outstanding charges. You intend to pay these charges and the interest amounts in the 2011-12 financial year.

You intend to travel to inspect your rental property once per year. The trip will take approximately ten days including two days travel each way and one day spent inspecting your rental property. You do not intend to do any sightseeing but you will be staying with family for part of the trip to limit your accommodation costs. Generally your spouse and children will not be accompanying you on the trips.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question 1:

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Taxation Ruling TR 97/7 sets out the Commissioner's views on the meaning of incurred under section 51(1) of the Income Tax Assessment Act 1936 (replaced by section 8-1 of the ITAA 1997).

To claim a deduction under section 8-1 of the ITAA 1997 an expense must be incurred by the taxpayer in the course of gaining or producing their assessable income.

There is no statutory meaning of 'incurred'.

Generally, you incur an expense at the time you owe a present money debt that you cannot escape.

The courts have developed a set of rules that help to determine if an expense has been incurred.

· there must be a presently existing liability to pay a pecuniary sum;

· the taxpayer's liability may be defeasible by others;

· the liability must be a sum certain or capable of reasonable estimation;

· presently existing liability is determined on the circumstances of the case;

· an expense is incurred when actually paid if there was no presently existing liability.

To claim an expense as a deduction in a particular income year, it must have been incurred and properly referrable to that income year.

However, paragraphs 10 to 14 of TR 97/7 state that where a taxpayer uses a cash method of accounting, that is, declaring income when it is received, it is acceptable to also use a cash method for expenses, that is, the expense is accounted for when it is paid. The only proviso is that expenses are not claimed firstly when they are 'incurred' as defined above, then again when they are actually paid. A consistent approach must be maintained to only account for expenses when they are actually paid.

In your case, you have incurred common area maintenance charges and fixed electricity charges, and interest on these charges, in respect of your rental property since the 2008-09 financial year. These expenses have not been paid, however you intend to pay them in 2011-12 financial year.

Although the expenses are incurred in years prior to 2011-12, you are able to claim all of the expense (including the interest amounts) in the year in which it is paid. You must ensure however that a consistent approach is maintained and all of your expenses are only claimed when they are actually paid.

Question 2:

Our publication Rental Properties 2011-12 (NAT 1729) is a guide to help owners of rental properties determine what expenses are allowable deductions. Page thirteen of the guide explains that when a taxpayer travels to inspect or maintain a rental property, they may be able to claim a full deduction for the costs of the travel where the sole purpose of the trip related to the property.

However, where the circumstances of the travel include private reasons (such as a holiday) or reasons of a capital nature (such as inspecting a residential property with a view to purchasing the property for income producing purposes) you are only entitled to a partial deduction.

Therefore, the expenses of your trip will only be fully deductible if the sole purpose of your trip is to inspect your rental property. If your trip has dual purposes, such as visiting family as well as inspecting your rental property, you will need to apportion your travel expenses in accordance with those purposes (for example if you spend half of your trip visiting family, only half of your expenses would be deductible).

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