Edited version of private advice

Authorisation Number: 1052005746021

Date of advice: 13 July 2022

Ruling

Subject: Rental and trust expenses

Question 1

Are the ASIC fees paid by the trust in respect of the corporate trustee deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the repairs carried out to the property prior to the property being rented deductible under section 25-10 of the ITAA 1997?

Answer

No

Question 3

Are the initial repairs and other capital works completed on the property deductible as capital works under Division 43 of the ITAA 1997?

Answer

Yes

Question 4

Are the depreciating assets purchased for less than $300 and installed ready for use for a taxable purpose immediately deductible under Division 40 of the ITAA 1997?

Answer

Yes

Question 5

Are the depreciating assets purchased for more than $300 and installed ready for use for a taxable purpose deductible over the relevant number of years under Division 40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust holds an investment property.

The trustee of the Trust is a company.

The company's sole function is to act as a corporate trustee. The trustee manages the trust and causes the derivation of income by the trust.

Annual ASIC fees are payable for the company to maintain its company registration.

The ASIC fees are paid out of the trust's funds.

A contract to purchase the property was entered into in 20XX, and settlement during the year ended 30 June 20XX

Repairs were carried out on the property prior to it being rented out as a residential rental.

The property commenced being rented during the year ended 30 June 20XX.

Initial repairs to the property included:

Table 1: Initial repairs to the property

Table 2: Capital works carried out at the property

Table 3: Depreciating assets purchased for the property

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-72

Income Tax Assessment Act 1997 section 40-75

Income Tax Assessment Act 1997 subsection 40-80(2)

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 section 43-20

Income Tax Assessment Act 1997 section 43-25

Income Tax Assessment Act 1997 section 43-70

Reasons for decision

Question 1

Summary

The ASIC fees are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as they were incurred in gaining or producing the assessable income of the Trust, they are not of a capital, private or domestic nature, do not relate to the earning of exempt or non-assessable non-exempt income and no provision of the ITAA 1997 prevents you from deducting it.

Detailed reasoning

Section 8-1 of the ITAA 1997 provides:

(1)  You can deduct from your assessable income any loss or outgoing to the extent that:

(a)         it is incurred in gaining or producing your assessable income; or

(b)          it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2)  However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)         it is a loss or outgoing of capital, or of a capital nature; or

(b)         it is a loss or outgoing of a private or domestic nature; or

(c)          it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

(d)         a provision of this Act prevents you from deducting it.

The ASIC fees paid to maintain the company registration of the corporate trustee were incurred in gaining and producing your assessable income, as the company is required to maintain registration in order to manage the trust and its investments. The company's sole function is to be the corporate trustee and does not earn any income in its own capacity and therefore does not have a requirement to lodge a tax return. Further the payment is not a loss or outgoing of a capital, private or domestic nature, it was not incurred in relation to gaining or producing exempt or non-assessable non-exempt income and no provisions of the ITAA 1997 prevent a deduction being claimed for the ASIC fees.

Therefore, the ASIC fees are deductible by the trust under section 8-1 of the ITAA 1997.

Question 2

Summary

The expenses incurred in repairing and remedying the defects, damage or deterioration that existed at the time of acquisition of the property are capital expenditure and not deductible under section 25-10 of the ITAA 1997.

Detailed reasoning

Taxation Ruling TR 97/23 Income Tax: deductions for repairs explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10 of the ITAA 1997.

Paragraphs 59 to 61 of TR 97/23 provide that initial repairs are of a capital nature and are not deductible:

59. Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. This is so whether the property is purchased or obtained under lease or licence by the taxpayer. The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred: but see paragraphs 63 to 66 of this Ruling in relation to dissecting or apportioning initial repair costs.

60. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration:

(a)         existed at the time of acquisition of the property; and

(b)         did not arise from the operations of the person who incurs the expenditure.

61. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs. We consider that the English Court of Appeal decision in Odeon Associated Theatres Ltd v. Jones (Inspector of Taxes) [1972] 1 All ER 681 is not authority in Australia for a contrary view. An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit yielding structure. It is capital expenditure and is not deductible under section 25-10.

The repairs completed on the property were to rectify defects, damage or deterioration that existed at the time of acquisition. Therefore, the expenses incurred in repairing and remedying the defects, damage or deterioration that existed at the time of acquisition are capital expenditure and not deductible under section 25-10 of the ITAA 1997.

Question 3

Summary

You can claim a deduction for the initial repairs and the capital works listed in the facts at the rate of 2.5% over 40 years in accordance with section 43-25 of the ITAA 1997.

Detailed reasoning

Division 43 of the ITAA 1997 provides a deduction for construction expenditure on capital works.

Capital works include improvements to buildings under subsection 43-20(1) of the ITAA 1997.

Subsection 43-70(1) of the ITAA 1997 provides construction expenditure is capital expenditure incurred in respect of the construction of capital works. Subsection 43-70(2) of the ITAA 1997 lists expenditure that are excluded from the definition of construction expenditure. None of those exclusions apply in this case.

Expenditure incurred in remedying defects, damage or deterioration in existence at the date of acquisition, also known as initial repairs, is capital in nature and is not deductible under section 25-10 of the ITAA 1997. As those initial repairs are capital in nature and can generally be seen as improvements to the building, they are qualifying construction expenditure for the purposes of Division 43 of the ITAA 1997.

Therefore, you can claim a deduction for the initial repairs and the capital works listed in the facts at the rate of 2.5% over 40 years in accordance with section 43-25 of the ITAA 1997.

Questions 4 and 5

Summary

For assets costing $300 or less, you can claim an immediate deduction (that is, a full deduction) for this cost in the income year you used the asset for a taxable purpose in accordance with subsection 40-80(2) of the ITAA 1997.

For depreciating assets costing more than $300, you can claim deductions for the decline in value over its effective useful life, using either the diminishing value method set out in section 40-72 of the ITAA 1997, or the prime cost method set out in section 40-75 of the ITAA 1997.

Detailed reasoning

Subsection 40-25(1) of the ITAA 1997 provides that you can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a depreciating asset that you held for any time during the year.

Section 40-30 of the ITAA provides that a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used except land, trading stock or some intangible assets. Depreciable assets are those items that can be described as plant, that don't form part of rental property premises. Premises refers to the actual structure of the rental property's building. These items are usually:

•   separately identifiable

•   not likely to be permanent

•   such that replacement of the item will occur within a relatively short period

•   not part of the structure of the building.

For assets costing $300 or less, you can claim an immediate deduction (that is, a full deduction) for this cost in the income year you used the asset for a taxable purpose in accordance with subsection 40-80(2) of the ITAA 1997.

For depreciating assets costing more than $300, you can claim deductions for its decline in value over its effective useful life, using either the diminishing value method set out in section 40-72 of the ITAA 1997, or the prime cost method set out in section 40-75 of the ITAA 1997.

You can claim decline in value for new assets but not for second-hand or used assets.

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