Edited version of private advice

Authorisation Number: 1051988807244

Date of advice: 31 May 2022

Ruling

Subject: Rental deductions for capital works and repairs

Question 1

Are the expenses in Table 1 considered repairs and allowable deductions under section 25 of the Income Tax Assessment Act (ITAA) 1997?

Answer

Yes

Question 2

Are the expenses in Table 2 considered depreciable assets under section 40-25 of Income Tax Assessment Act 1997 and eligible to be included in the properties cost base?

Answer 2

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In XXXX the taxpayer used a real estate agent and rented out his apartment to a tenant.

Prior to this he was living in the premises. From XXXX financial year the premises become an assessable income producing asset.

Subsequently, over the next X months period, the tenant severely damaged the apartment during their tenanted period and the period where the tenant was attempted to be removed from the premises.

Income was earned from this tenancy agreement over both XXXX and XXXX financial years. However, the damage and repairs costs incurred fell within the XXXX financial year.

You have incurred the following expenses in the year ended 30 June 20XX

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25

Income Tax Assessment Act 1997 Section 40-25

Reasons for decision

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.

You have rental income and can claim certain rental expenses as a deduction.

Deductions for repairs and maintenance

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction.

The term 'repair' means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

If you are preventing or fixing deterioration of an item that occurred while renting out your property, this is likely to be maintenance. For example, getting faded interior walls repainted of having a deck re-oiled. This should be claimed at Repair and Maintenance on the rental schedule.

In your case, the property was rented during the period you incurred the expenses, and the expenses listed in Table 1 allowable deductions under section 25 of the Income Tax Assessment Act 1997 (ITAA).

Decline in value (Capital Allowances)

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that can reasonably be expected to decline in value over time it is used (section 40-30 of ITAA 1997)

Depreciating assets are those items that can be described as plant, which do not form part of the premises. These items are usually: separately identifiable; not likely to be permanent and expected to be replaced within a relatively short period and not part of the structure. Examples of assets that deductions for decline in value can be applied to include timber flooring, carpets, curtains, appliances like a washing machine or fridge and furniture

The expenses listed in Table 2 can be claimed as a depreciable asset as outlined in section 40-25 of the ITAA 1997.

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