Edited version of private advice

Authorisation Number: 1052346220026

Date of advice: 11 February 2025

Ruling

Subject: Deductions - rental expenses

Issue: rental expenses

Question 1

Can you claim a deduction for rental expenses incurred during the period your property was vacant due to repairs and maintenance under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Issue: legal expenses

Question 1

Can the legal expenses you incurred regarding the legal action taken against the former real estate agency managing your investment property be claimed as a deduction under section 8-1 of the ITAA 1997?

Answer 1

Yes.

Question 2

Can the legal expenses you incurred regarding the legal action taken against you in respect to your investment property be claimed as a deduction under section 8-1 of the ITAA 1997?

Answer 2

Yes.

Issue: work-related expenses

Question 1

Is the internal security camera installed in your home office deductible under section 8-1 of the ITAA 1997?

Answer 1

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

On XX XX 20XX you purchased the property located at XX XX XX (the Property).

The property was purchased as a rental property and has always been used to produce assessable income.

You employed a real estate agent to manage the property in 20XX.

From XX XX 20XX to XX XX 20XX the property was rented to tenants.

From XX XX 20XX to XX 20XX the property was vacant and repairs were made to fix water leaks in the bathroom, as well as repairs and repainting.

Rental expenses

Between XX XX 20XX and XX 20XX you were invoiced by multiply builders, plumbers and painters for work done to rectify water leaks in the bathroom as well as repairs and repainting.

From XX 20XX the property continues to be tenanted.

Legal expenses

During the 20XX financial year, you paid $XX and a further $XX in the 20XX financial year to your Legal represent regarding legal action against your former real estate agency managing your investment property.

You claim the real estate agency failed in their duty to ensure faults were identified as soon as possible during property inspections and brought to your attention for remediation.

The legal outcome you were seeking when you sued your former real estate agent was to recover your loss of rental income through an action for breach of contract, misleading and deceptive behaviour, and negligence in relation to agent use of trust money.

This matter is ongoing.

You paid a further $XX in legal fees to defend yourself against the unit/landowner of the property below yours who sued you for damages to their property which were the direct result of the shower and bathroom leaks from your property.

The legal outcome you were seeking was to defend your legal interests as owner of the unit from which you derive rental income, arising from the legal action brought against you by a fellow unit owner.

The defence was to be undertaken as a legal demand letter was received and you employed your solicitor acting on the claim against your former real estate agent to stop any default order for liability to the unit below (unit XX).

The legal matters have not been put to a court or tribunal yet.

Work-related expenses

On XX XX 20XX you ordered an indoor home security camera for $XX.

In the 20XX financial year you paid $XX to install the camera facing your workstation in your home office. Your employment deals with confidential sensitive client and employer information. The security camera is not required by your employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Issue: rental expenses

Question 1

Can you claim a deduction for rental expenses incurred during the period your property was vacant due to repairs and maintenance under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

You can claim a deduction for rental expenses incurred during the period your property was vacant due to repairs and maintenance relating to the period your property was used to produce income.

Detailed reasoning

Income Tax Assessment Act 1997 (ITAA 1997) section 25-10

Repairs

You can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income.

Property held or used partly for that purpose

If you held or used the property only partly for that purpose, you can deduct so much of the expenditure as is reasonable in the circumstances.

No deduction for capital expenditure

You cannot deduct capital expenditure under this section.

Taxation Ruling IT 180 Repairs to property carried out after cessation of income production

In a typical case, the then Second Commissioner said:

'The question falling for consideration was whether expenditure incurred by the taxpayer during the year of income for repairs to premises which had been held by her for the purpose of producing assessable income during the year of income constituted an allowable deduction for the purposes of section 53 of the Income Tax Assessment Act 1936-1948. The point taken for the Commissioner was that, as the repairs were effected and paid for after the property had ceased to be rent producing, the expenditure was not to premises 'held, occupied or used' for the purposes of producing assessable income. It was thought that the deduction was debarred by the terms of section 53(2).

The view now held is that, providing the necessity for the repairs can be related to the period of time during which the premises were producing assessable income and providing, further, that the premises have produced assessable income during the year in which the expenditure was incurred, the provisions of section 53, in this regard, have been satisfied. A similar attitude has been adopted by this office in other parallel cases.'

When a rental property is vacant, the cost of repairs may still be deductible provided the need for the repairs is related to the period in which the property was used by you to produce income and the property was income-producing during the income year in which you incurred the cost of repairs.

In your circumstance you are entitled to claim a deduction for the repairs of your rental property as the repairs came from a related period in which the property was producing assessable income.

Issue: legal expenses

Question 1

Can the legal expenses you incurred regarding the legal action taken against the former real estate agency managing your investment property be claimed as a deduction under section 8-1 of the ITAA 1997?

Question 2

Can the legal expenses you incurred regarding the legal action taken against you in respect to your investment property be claimed as a deduction under section 8-1 of the ITAA 1997?

Summary

You can claim the legal expenses you incurred for taking legal action against your former real estate agency and the legal action taken against you in respect to your investment property.

Detailed reasoning

Rental property legal expenses are costs you incur to prepare, register, protect and manage your rental property.

You can claim a deduction for some of the legal expenses you incur to produce your rental income. You can claim these expenses in the income year you incur them.

You can claim the cost of the following as deductions:

•                evicting a non-paying tenant

•                expenses for taking court action for loss of rental income

•                defending a claim for damages from injuries suffered by a third party on your rental property.

Most other legal expenses you incur relating to your rental property are capital and can't be claimed as a deduction.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Legal expenses can be characterised as an outgoing on revenue account or an outgoing of a capital nature, depending on the cause or purpose for which the legal expenses were incurred. The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, rather than of a revenue nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Where legal expenses arise as a consequence of the day-to-day activities of a business, that is, they are incurred in gaining or producing assessable income, the object of the expenditure is devoted towards a revenue end and the legal expenses are deductible (Herald & Weekly Times v. Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169).

Accordingly, deductions under section 8-1 of the ITAA 1997 may be claimed by landlord taxpayers for legal expenses that are incidental and relevant to the production of rental income derived.

ATO Interpretative Decision (ATO ID) 2003/484 provides some principles.

The principles espoused in Herald & Weekly Times were applied in Case C12 (1952) 3 TBRD 100 (Case C12). That case dealt with the trustees of a deceased estate, who let a city property to a number of tenants. A tenant's injured employee claimed damages against the trustees in respect of injuries she sustained on the rental premises. The Board, in allowing the trustees a deduction for the amount that they paid to settle the claim, stated that:

the trustees became liable because they had let rooms to tenants, It was in the capacity of landlord that the outgoing was incurred. The expense incurred resulted from a risk which, to a landlord, is ever present. The expense claimed as a deduction was one which arose out of the letting of the building to tenants for the purpose of producing assessable income, and that it can properly be regarded as having been incurred 'in the course of' gaining or producing that assessable income. I cannot see that the outgoing produced "an enduring benefit" of any sort. I can see no justification for capitalising the expense. It seems to me to be one which should properly be set against revenue account.

The taxpayer and their spouse incurred the legal expenses in their capacity as landlords of the rental property. The expenses arose out of the letting of the premises to a tenant for the purposes of producing assessable income. There is a clear connection between their legal expenses and their rental income such that the expenses are incidental and relevant to the generation of their assessable rental income. There was no enduring benefit produced by the expenditure and therefore it is appropriate to treat the expense as being on revenue account.

Therefore, the taxpayer and their spouse are entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses that they have incurred in defending the damages claim.

In your circumstance you are entitled to claim a deduction of your legal fees incurred to due your legal action brought against the real estate agent, and to defend yourself from being sued by the owner of the unit below in respect of the damage suffered by their unit, with both legal actions arising from the letting of the premises to a tenant for the purposes of producing assessable income.

Issue: work-related expenses

Question 1

Is the internal security camera installed in your home office deductible under section 8-1 of the ITAA 1997?

Summary

No, the internal security camera installed in your home office is not tax deductable, as there is an insufficient link between the purchase of the camera and your income-producing activities as an employee. This expense is then essentially private in nature.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

TR 93/30 Income tax: deductions for home office expenses

As a general rule, expenses associated with a taxpayer's home are of a private or domestic nature and do not qualify as deductions for taxation purposes. An exception to this general rule is where part of the home is used for income producing activities and has the character of a 'place of business'. In such cases some of the expenses incurred in respect of the home such as rent, interest, repairs, house and contents insurance, rates and property taxes may be partly deductible.

Another exception to this general rule is where part of the home is used in connection with the taxpayer's income earning activities but does not constitute a place of business. In this case, a more limited range of deductions may be available.

Whether an area of the home has the character of a place of business is a question of fact which depends on the particular circumstances of each case. This is likely to be the case where a part of a residence is set aside exclusively for the carrying on of a business by a self-employed person (e.g., a doctor's surgery). Another example is where part of the home is used as a taxpayer's sole base of operations for income producing activities (e.g., where no other work location is provided to an employee by an employer).

In your circumstance the internal security cameras installed in your home office are not tax deductable as there is no direct link between the purchase of the cameras and your income earning activities. We acknowledge the home security cameras may detect intruders, but they cannot specifically protect sensitive information from being stolen, in the way that a security cabinet would for example. In these circumstances, the expenses are essentially private in nature.

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