Edited version of private advice

Authorisation Number: 1052095259855

Date of advice: 5 April 2023

Ruling

Subject: Rental property deductions

Question 1

Are you entitled to a deduction for the expenses associated with your rental property?

Answer

No.

Question 2

Can the expenses associated with the rental property form part of the cost base?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You have a rental property.

The property was rented out continuously for several years.

During this time there were a number of tenants.

Repairs were required to be carried out on the property.

During the period the repairs were being done the property was not tenanted.

You had difficulty getting trades people to do the work due to covid.

You did not accept all quotes as they were too expensive.

The repairs took place intermittently over a period of time greater than a single income year and no income was generated during the ruling period.

Repairs included:

•         Roof repainting and repair

•         Restore kitchen

•         Retouch and repair paint

•         Repair deteriorated path

You did not rent the property out as you thought it would be an inconvenience for the tenants as they would have been restricted in terms of not being able to use the whole property.

Apart from repair expenses you had other expenses such as rates and insurance.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

An expense is deductible under section 8-1 of the Income Tax Assessment Act 1997 (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.

You elected to not make the property available for rent for the duration of the repairs which was a lengthy period of time.

There was nothing that prevented you from making the property available for rent apart from the fact you thought it would be an inconvenience to the tenants. Furthermore, for a considerable period of the ruling period no repairs were being undertaken.

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.

Section 25-10 of the ITAA 1997 provides for a deduction for expenses incurred for repairs to premises that are held or used solely for income producing purposes. However, section 25-10 of the ITAA 1997 requires that the property be income producing during the income year that the repair expense are incurred. Refer to Taxation Ruling IT 180 Repairs to property carried out after cessation of income production

You are not entitled to a deduction for the repairs on your rental property as the property was not generate income during the relevant income year.

Cost Base

Subdivision 110-A of ITAA 1997 contains the rules for working out the cost base of a CGT asset.

Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset has 5 elements. These include the initial cost of the asset, as well as certain other costs associated with acquiring, holding and disposing of the asset.

The 5 elements are:

1)    The money paid, or required to be paid, in respect of acquiring the CGT asset and/or the market value of any other property given, or required to be given, in respect of acquiring the CGT asset.

2)    Incidental costs of acquiring the asset, or costs in relation to the CGT event. These costs include stamp duty, legal fees, agent's commission and fees paid for professional services. Note that you cannot include these costs if you have or can deduct them.

3)    Non-capital costs incurred in connection with ownership, for example, interest, rates, land tax, repairs and insurance premiums.

4)    Capital expenditure incurred to increase the value of the asset, if the expenditure is reflected in the state or nature of the asset at the time of the CGT event, for example, extensive renovations undertaken to the CGT asset.

5)    Capital expenditure incurred to preserve or defend the title or rights to the asset.

As you will note in element 3 above, subsection 110-25(4) states out that the third element consists of the costs of owning the asset you incurred but only if you acquired the asset after 20 August 1991.

Section 110-45(1B) explains that expenditure does not form part of the second or third element of the cost base to the extent that you have deducted or can deduct it.

As the repairs and other expenses for the ruling period are not an allowable deduction they can form part of the cost base under element 3 when calculating any capital gains or loss.

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