Edited version of private advice

Authorisation Number: 1052075521650

Date of advice: 8 June 2023

Ruling

Subject: Deductions - rental property

Question

Are you entitled to a deduction for the cost of repairs to your rental property that were paid for in the 20XX financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

You purchased a property (the property). Your intent at the time of purchase was to reside in the property.

You lived in the property for only a number of days before moving away and renting the property out.

The property was rented out for a considerable period of time before the last tenant occupied the property.

The property was mismanaged by your property manager with the last tenant (the property manager).

Your last tenant was ordered with an eviction notice form the property due to owing rent and causing damage to the property.

The tenant and property manager made it hard for you to organise trades to inspect the property for damage and quotes.

It took several attempts to evict the tenant, with the tenant vacating the property on DDMMYYYY.

At this point in time the property was not in a state to let.

You tried to organise with the property manager what further works/repairs needed to be done to the property after the tenant was evicted.

Your property manager was vague and elusive.

You were still awaiting quotes from the property manager for some works/repairs.

The property was not advertised for rent again after the last tenant was evicted.

Repairs to the property were completed during the 20XX financial year

You decided to sell the property.

The property remained vacant following the date your last tenant moved out and when the property was sold.

The property was sold, and settlement occurred on the property in the 20XX financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

(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-a ssessable non-exempt income; or

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

An expense is deductible under section 8-1 of the ITAA 1997 if and to the extent to which it is incurred in gaining or producing your assessable income or in carrying on a business for that purpose. However, you cannot claim a deduction for an expense that is of a capital, private or domestic nature.

A deduction is only allowable if an expense:

• is actually incurred
• meets the deductibility tests
• satisfies the substantiation rules.

For section 8-1 of the ITAA 1997 to apply there must be a nexus with an income producing purpose.

In your situation, the property was not available for rent during the 20XX financial year and as such there was no assessable income and therefore no income producing purpose.

There is insufficient nexus with the earning of assessable income to allow a deduction under section 8-1 of the ITAA 1997 for the expenses associated with your rental property during the ruling period.

Subsection 25-10(1) of the ITAA 1997 allows a deduction for expenses incurred for repairs to premises that are held or used solely for income producing purposes.

Subsection 25-10(2) of the ITAA 1997 allows a deduction for the cost of repairs to premises partly used for income producing purposes but can deduct only so much of the expenditure as is reasonable in the circumstances.

Paragraph 4 of Taxation Ruling IT 180 Repairs to property carried out after cessation of income production (IT 180) states that the cost of repairs to a property after it stops being used to produce assessable income may be deductible providing:

• the necessity for the repairs can be related to a period of time during which the premises have been used to produce assessable income of the taxpayer, and
• the premises have been used in the production of such assessable income of the year of income in which the expenditure was incurred.

As the expenditure incurred was in a year where there was no assessable income from the rental property, both of the above conditions in IT 180 and have not been met, therefore any expenses incurred during the ruling period are not deductible under section 25-10 of the ITAA 1997.

Taxation Ruling TR 97/23 (TR 97/23) deals with the issue of deductions for repairs. Generally, a 'repair' involves a restoration of a thing to a condition it formally 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 (paragraphs 13-16 of TR 97/23).

Paragraph 73 of TR 97/23 looks at the deductibility of repairs which relates to expenditure for repairs after property is held, etc., for income purposes but before income is actually derived.

Paragraph 73 specifically states that:

A deduction is allowable under section 25-10 for repair expenditure incurred in a year of income after property is first held, etc., for income purposes but before income is actually derived from the property, provided the repairs are not initial repairs. For example, a rental property may be vacant but be advertised as being available for rental. Before a tenant occupies the property, storm damage or an accidental breakage occurs. Expenditure incurred to repair the damage or breakage is deductible under section 25-10 because the property is held, etc., for income purposes.

You have highlighted this paragraph as a point of reference to support your claims that the expenditure incurred on repairs to the property are deductible.

This paragraph has no application to your circumstances as you are not seeking a deduction for repairs carried out on your property prior to earning assessable income.

In your case, it is acknowledged that some of the need for repairs and maintenance to the property relates to the period the property was leased and resulted from damage from the tenant.

After the eviction of the last tenant, on DDMMYYYY, the property was not in a state to be rented out. At this point in time the property was taken off the rental market and unavailable for rent.

The property continued to be unavailable for rent into the 20XX financial year and as a result no assessable income was received. Repairs to the property were undertaken and completed in the 20XX financial year.

You then decided to sell the property in the 20XX financial year without placing the property bank on the market for rent.

Conclusion

As the property had not been used in the production of assessable income in the year of income in which the expenditure was incurred, both of the conditions outlined in IT 180 have not been met. Therefore, any expenses incurred during the ruling period are not deductible under section 25-10 of the ITAA 1997.

There is also insufficient nexus with the earning of assessable income to allow a deduction under section 8-1 of the ITAA 1997 for the expenses associated with your rental property during the ruling period.

Therefore, as the property was not available for rent and not used in the production of assessable income in the 20XX financial year any costs for repairs and maintenance to the property in the 20XX financial year are not deductible.

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