Edited version of private advice

Authorisation Number: 1052386268955

Date of advice: 30 April 2025

Ruling

Subject: Rental deductions

Question 1

Are you entitled to a deduction for the costs associated with renovations once your rental property has ceased deriving rental income?

Answer 1

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The property was rented out for several years.

You lodged your tax return for the earlier income year declaring your rental income from the property.

The real estate agent sent an annual financial statement of all rental income and expenses, and this was used to prepare the income tax return - this annual statement included the rental income received in the agent's trust account during the relevant month.

You received the month's rental income from your agent in the following month.

You had no rental income in the later income year.

You decided not to rent the property out in the later income year as you were going to resume living in the dwelling.

You needed to renovate the former rental property.

The invoices for the expenses were received in the earlier income year.

You moved back into the property and commenced treating it as your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides for a deduction for expenses incurred for repairs to premises that are held or used solely for income producing purposes. However, a deduction for capital expenditure is not allowed under this section (subsection 25-10(3) of the ITAA 1997).

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.

Where a tenant moves out of a rental property and repairs are required to be carried out prior to the property either being sold or re-tenanted are an allowable deduction as they have the relevant nexus to the income earning activity.

Example 19 of the rental properties Guide provides:

Repairs when the property is no longer rented out

After the last tenants moved out in September 2020, the Hitchmans discovered that the stove did not work, kitchen tiles were cracked and the toilet window was broken. They also discovered a hole in a bedroom wall that had been covered with a poster. In October 2020, the Hitchmans paid for this damage to be repaired so they could sell the property.

As the tenants were no longer in the property, the Hitchmans were not using the property to produce rental income. However, they could still claim a deduction for repairs to the property because the repairs related to the period when their tenants were living in the property and the repairs were completed before the end of the income year in which the property ceased to be used to produce income.

You are not entitled to claim repairs for the renovation expenses as they do not have a connection to your income earning activity as the property ceased being a rental property.

You have lodged your earlier return declaring rental income for the financial year.

The renovations occurred in the later income year when you derived no rental income.

Subsection 6-5(4) of the ITAA 1997 provides that you derive an amount of ordinary income as soon as it is applied or dealt with in any way on your behalf, or as you direct.

While you claim that you did not receive the income from your agent until the later financial year, the income was derived by you in the earlier income year and was dealt with on your behalf by your agent as per your agreement with the agent for them to manage the property on your behalf.

You are unable to amend the previous year's income tax return to remove the month's rental income, and include this amount in the following year's income tax return to claim the expenses for the renovations as a tax deduction, as the property had ceased to be available for rent after the previous financial year.

The agents annual statement sets out when the income was derived by you in the earlier income year.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).