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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012410285779

Ruling

Subject: Rental deductions

Question 1

Are you entitled to an outright deduction for the following work carried out to your investment property?

Answer

Yes

Question 2

Are you entitled to a 2.5% capital works deduction with respect to the following items?

Answer

Yes

Question 3

Are you entitled to claim a deduction for the decline in value of the following items listed?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You are the sole owner of a rental property which you purchased several years ago.

The property was in good condition and was checked for termite activity as per "Offer and acceptance".

The timber fence was obviously old but still standing.

The white ant problem was identified in the in the treatment report August 2011

During the 2012 income year you had work carried out to return the property to a rentable state.

The work included the following;

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 40-25

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 43-10

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for that purpose. However, a deduction is not allowable for outgoings that are of a capital, private or domestic nature.

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature.

Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition it formerly had without changing its character. Works can 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.

TR 97/23 indicates that expenditure for repairs to property is of a capital nature where:

In your case, you have incurred expenses for the following work on your rental property in relation to:

As a result you have incurred expenses to restore your property to a rentable state. The above items are not considered to be capital in nature. Therefore, you are entitled to a deduction for these repairs.

Capital works

Section 43-10 of the ITAA 1997 operates generally to provide a deduction for capital expenditure on capital works used to produce assessable income. Capital works includes buildings and structural improvements or an extension, alteration or improvement to a building.  A deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure.

A capital works deduction is generally claimed at a rate of 2.5% over 40 years.

In your case, the following items are considered to be a renewal of an entirety and not deductible as a repair:

However you are entitled to a 2.5% capital works deduction in relation to the above items.

Decline in value

A deduction is allowable under section 40-25 of the ITAA 1997 for the decline in value of depreciating assets within the definition of subsection 40-30(1) of the ITAA 1997. Depreciating assets have a limited effective life and can reasonably be expected to decline in value over the time they are used in the rental property.

The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it for a taxable purpose during the income year in which the deduction is available.

These items are considered to be depreciating assets and therefore, you are entitled to a deduction for their decline in value.

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