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Edited version of your written advice
Authorisation Number: 1012736905692
Ruling
Subject: Rental property
Question 1
Is entity A entitled to a deduction for installing a termite baiting system?
Answer
No.
Question 2
Is entity A entitled to a deduction for its portion of the cost of annual pest inspections?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commenced on
I July 2012
Relevant facts
Entity A has part ownership of a rental property. The property is rented.
A termite baiting system was installed on the property in order to protect the property from possible termite attack. The system lasts a lifetime. Entity A also pays an annual fee which covers checks throughout the year and replacement of stations if required.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the 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.
The question of whether or not an expense is of a capital or revenue nature depends upon a consideration of the facts and circumstances of each case.
The following guidelines for determining whether a loss or outgoing is of a capital nature have been set down by the High Court in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 5 ATD 23; 5 ATD 87; 61 CLR 337:
• the expenditure is related to the business structure itself, that is, the establishment, replacement or enlargement of the profit yielding structure rather than the money earning process, or
• the nature of the advantage has lasting and enduring benefit, or
• the payment is 'once and for all' for the future use of the asset or advantage rather than being recurrent and ongoing.
Annual pest inspections and the annual spraying for pests are deductible under section 8-1 of the ITAA 1997 for rental properties as the expense is recurrent and revenue in nature.
As the entity does not have 100% ownership in the property, only the relevant portion equal to the ownership interest is an allowable deduction to the entity. The other owners are entitled to a deduction for their share of the annual expense.
The cost of installing a termite barrier or installing a termite baiting system is incurred to protect the property and designed to have a lasting benefit. Installing a termite baiting system is capital in nature. Therefore no deduction is allowable under section 8-1 of the ITAA 1997.
The termite baiting system is not regarded as capital works therefore no deduction is allowable under Division 43 of the ITAA 1997.
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