Edited version of private advice

Authorisation Number: 5010073018847

Date of advice: 16 April 2021

Ruling

Subject: Deduction - cost of repairs to property

Question 1

Are you entitled to a deduction for the cost of repairs to the property that were completed and paid for before 30 June 20XX?

Answer

Yes.

Question 2

Are you entitled to a deduction for the cost of repairs to your property made after 1 July 2019?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You jointly own a property.

The property was rented for over XX years and was actively managed by a Property Manager

The property ceased to be an income producing property in before the end of the 20XX income year when the tenancy ended.

After the tenants moved out you determined that repairs and maintenance needed to be undertaken to restore the property to its original state.

You arranged, paid for and completed all the repairs, except the roof prior to the 30 June 20XX.

You moved into the property in after 30 June 20XX.

After 30 June, you became aware that the further repairs were needed

You arranged, paid for and completed the repairs by the end of 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 8-1

Income Tax Assessment Act 1997, subsection 25-10(1)

Income Tax Assessment Act 1997, subsection 25-10(2)

Reasons for decision

Summary

You are entitled to a deduction for the cost of repairs made to your property in the financial year in which the property is used for income producing purposes. However, no deduction is allowed for the cost of repairs to the property when those repairs are made and paid for in a year when the property is not used for income producing purposes.

Detailed reasoning

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-assessable non-exempt income; or

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

Subsection 25-10(1) of the ITAA 1997 allows a deduction for the cost of repairs to premises solely used 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.

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 79 of TR 97/23 states the situation when a property is used for income producing purposes for only part of the income year. If property is held in a year of income partly for income purposes and partly for non-income purposes, repair expenditure is only deductible to the extent that is reasonable in the circumstances of the case. The reasonableness test is an objective one and each case must be decided on its own merits. However, we would expect that the amount of expenditure allowable as a deduction under subsection 25-10(2) would ordinarily be calculated by reference to the extent to which the property was held in the year of income for income purposes.

Taxation Ruling IT 180 states 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 cost of any repairs will be deductible.

In Your Case

After your tenants moved out and before you moved into the property you undertook and paid for repairs to be made to the property to restore it to its original state, all by 30 June 20XX, the year when this property was last used to produce income. As the work done makes good on the deterioration of the property, and that you only rented the property for part of the 20XX financial year you are entitled to a deduction for the repairs made by the end of that financial year.

After 1 July 20XX you found that the other repairs were needed. You commenced and completed the repairs and the payment of the repairs within the relevant period. Because the property was not used for income producing purposes and that you moved into the property in July of the relevant period, the cost of the repair is private and domestic in nature and therefore the cost of the roof repair is not deductible under section 8-1 or subsections 25-10(1) and 25-10(2) of the ITAA 1997.

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).