Edited version of private advice

Authorisation Number: 1051804901101

Date of advice: 11 March 2021

Ruling

Subject: Rental deductions - repairs

Question

Can you deduct amounts for repair of water damage under section 25-10 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse own a rental property (The Property).You are tenants -in-common with a XX% ownership interest each.

The Property has been consistently rented out since 20XX, except for the period from XXXX to XXXX.

On XXXX, the tenants had to vacate The Property due to water damage in the upstairs bathroom.

On XXXX, you lodged a claim with your insurer for damages sustained to your rental property from water leaking from the shower in the upstairs ensuite bathroom. Your insurer engaged a company to conduct a site inspection for the purpose of assessing the cause and extent of the damage.A building inspection report provided to your insurer assessed the damage as being caused by water ingress from poorly installed seals to shower recess.

The report also stated that the shower recess caulking and grout deteriorated causing water ingress to ceiling downstairs and to the room next to the upstairs ensuite bathroom

Based on the report and other information provided to your insurer, the claims area formally notified you shortly after that your claim had been denied.Your claim for insurance repairs was denied because the damage was found to have been caused over a period of at least XX months.

Your insurance policy would only cover the damage if it was caused by water or liquid suddenly escaping from your shower.

You lodged a dispute with your insurer regarding the rejection of your claim. You requested a review of the denied claim as you believed that the leak was a result of the waterproof membrane.

A short time later, your insurance company advised you via email that they had rejected your disputed claim.You were advised that you had not taken reasonable care to prevent the damage occurring after first being notified that rectification and repairs were required.

On XXXX, you received notice of the final rejection of your disputed claim.

In XXXX, you started obtaining quotes for the work required.

In XXXX, work commenced.

By XXXX, painting had been completed.By XXXX, repairs had been completed.

To remedy the leak in the bathroom, the internal walls were removed.The bathroom was waterproofed, plumbed, plastered and repainted.The leak also caused floorboards in the room adjoining the ensuite to be damaged.These floorboards were replaced and polished.

Work carried out was as follows:

•         Floor and wall tiles in upstairs bathroom were replaced

•         Shower screen and damaged toilet in upstairs bathroom were replaced

•         Hardwood flooring in the room adjoining the upstairs bathroom was replaced and polished due to water damage

•         Skirting boards, architraves and sections of plaster in adjoining room to upstairs bathroom were replaced

•         A section of plaster on the first-floor ceiling (under upstairs bathroom shower) was replaced due to water damage

•         Installation of lights

•         Installation of towel racks and other bathroom holders.

The approximate cost of the work undertaken including fittings is $X,XXX.

COVID lockdown had commenced shortly after repairs were completed.You were unable to rent out, photograph or arrange inspections of the property.

The Property was rented to new tenants on XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Summary

The necessity for the repairs undertaken arose during a period when The Property was producing assessable income. The Property was rented out prior to the repairs being undertaken. Following the completion of the repairs and delays due to COVID, The Property was rented out again and began earning assessable income. Therefore, a deduction is available for repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

General deductions

Under section 8-1 of ITAA 1997 you can deduct for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are of a capital, private or domestic nature.

Deductions for repairs

Under section 25-10 of the ITAA 1997, a deduction may beclaimed for expenses incurred to undertake repairs or maintenance to property used for income producing purposes.This is provided the repairs or maintenance are not capital or of a capital nature.

In this instance, the tenants were required to move out of The Property while repairs were being undertaken. Once repairs were completed and COVID restrictions allowed, The Property was once again rented out.

Therefore, you can deduct amounts for repairs under section 25-10 of the ITAA 1997, provided the amounts meet all the requirements in the section.

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