Edited version of private advice

Authorisation Number: 1052400880697

Date of advice: 26 May 2025

Ruling

Subject: Deductions - rental expenses

Question 1

Are you entitled to a deduction for the travel expenses that you incurred including airfares, accommodation and meals when inspecting your rental properties, meeting with lawyers and attending court hearings whilst visiting Australia?

Answer 1

No.

Question 2

Are you entitled to a deduction for the rental expenses that you incurred including land tax and water rates prior to the legal proceedings being finalised and the property being repaired?

Answer 2

Yes.

Question 3

Are you entitled to a deduction for the legal fees that you incurred in relation to damages to the property?

Answer 3

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 are an Australian citizen.

You are a non-resident of Australia.

You live in Country X.

You have sole ownership of an investment property in Australia (the property).

You have sole ownership of several other investment properties in Australia.

In 20XX, the property was first rented.

The property suffered damage from water seepage from the balcony of the above unit.

In 20XX, legal proceedings were held between you and the owner of the above unit, with the outcome in your favour.

The owner of the above unit did not properly repair the balcony, which resulted in further damage from water seepage to the property.

In late 20XX, the property was refurbished. Following this, the water seepage continued, which resulted in mould developing in the property.

In XX/20XX, destructive tests revealed black mould in the ceiling and the tenants that were renting the property relocated to a nearby hotel.

In XX/20XX, repairs to the property commenced and the property was stripped to its shell.

In XX/20XX, repairs to the property were delayed due to the continuing water seepage.

A claim was filed against the owner of the above unit. Resolution of the issue depends on the outcome, which is yet to be determined.

You incurred travel expenses including airfares, accommodation and meals whilst inspecting the property, meeting with lawyers and attending court hearings.

Your intention is to resume renting the property once the dispute is resolved, either through settlement or court judgment.

The property currently remains untenanted.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 26-31(1)

Income Tax Assessment Act 1997 section 26-102

Reasons for decision

Question 1

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to earning exempt income.

Travel expenses include the costs of travel to inspect, maintain or collect rent for the property and meals and accommodation that relate to that travel.

Section 26-31(1) of the ITAA 1997 states you cannot deduct a loss or outgoing you incur after 1 July 2017 if:

•                     it is related to travel,

•                     it is incurred in gaining or producing your assessable income from the use of residential premises as residential accommodation, and

•                     it is not necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Application to your circumstances

In your case, you incurred travel expenses for airfares, accommodation and meals whilst inspecting your rental property, meeting with lawyers and attending court proceedings relating to the property which arose because of a dispute with the owner of the above unit in relation to water damage.

As you are not in the business of renting properties and your rental property is an investment property, you are not entitled to a deduction for your travel expenses including airfares, accommodation and meal expenses when inspecting the property, meeting with lawyers and attending court hearings.

These expenses are considered capital in nature as they are private expenses, rather than expenses directly related to the income-earning process.

Question 2

You can claim deductions for rental expenses and decline in value to the extent that the property was genuinely available for rent during the income year.

Rental expenses are deductible to the extent that they are incurred for the purpose of producing rental income.

Expenses may be deductible for periods when the property is not rented out, providing the property is genuinely available for rent - that is:

•                     the property is advertised in ways which give it broad exposure to potential tenants, and

•                     having regard to all the circumstances, tenants are reasonably likely to rent it.

Application to your circumstances

The Commissioner is satisfied that the expenditure for your rental property is an allowable deduction under Section 8-1 of the ITAA 1997.

You are entitled to claim a deduction for the rental expenses including land tax and water rates that were incurred for your rental property, for the time that you intended to rent the property whilst the legal proceedings were occurring, and the property was unable to be repaired.

The deduction for the holding cost expenses is not disallowed under section 26-102 of the ITAA 1997, with the rental property being declared uninhabitable due to exceptional circumstances outside of your control.

Question 3

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of assessable income or business operations. The nature of the expense must also be considered. The nature or character of legal expenses follows the advantage that is being sought by incurring the expenses.

Application to your circumstances

You are involved in ongoing court proceedings against the owner of the unit above the property.

The advantage sought by you in relation to the court proceedings is to seek amounts for general damages to the property.

The occasion of the outgoing for legal expenses was not for your income producing activities, however for damage to the property itself.

Therefore, the legal expenses that you are incurring in seeking damages are not deductible under section 8-1 of the ITAA 1997 as they are insufficiently connected with your income earning activities and were of a private or capital nature. The need for them arose from damages to the property.

Therefore, you cannot claim a deduction for the legal expenses you have incurred to the extent that they relate to damages you are seeking.

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