Edited version of private ruling

Authorisation Number: 1011467039168

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Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for repairs undertaken on your property in the income year after it ceased to be income producing?

Answer

No.

Question 2

Are you entitled to a capital works deduction for costs incurred in relation to your investment property in the year where the property produced assessable income?

Answer

Yes.

This ruling applies for the following period/s:

Year ending 30 June 2008

Year ending 30 June 2009

The scheme commences on:

1 July 2007

Relevant facts and circumstances

You purchased a rental property in 200X.

You were unaware of any structural deficiencies of the property at the time of purchase.

The property was rented from late 200X until late 200Y.

While renting you discovered the property required repairs relating to various structural deficiencies.

You sought professional services to undertake the various repairs and alterations and have provided a break-up of costs.

The work was carried out after 200Y

You have provided a copy of the contract of purchase and but did not have any building or pest report completed.

You have provided a detailed copy of the quotations from architects for all alterations and repairs. There are no other invoices or details of costs.

You do not have an engineers report but have provided copies of several invoices for surveys, soil testing, permits, design certification and inspections that were carried out and paid for in the relevant financial year.

The property has not been rented or available for rent since late in the 200Y calendar year and will not be re-rented as you will be returning to live in the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10.

Income Tax Assessment Act 1997 Section 43

Summary

As there has been no assessable income produced from the property during the year that you incurred the expenditure, you are not entitled to claim a deduction for the costs of the repairs.

However, the costs for surveyor, soil testing, permits, inspections, certification documentation and supervision are considered capital expenditure and you are entitled to a deduction for capital works.

Detailed reasoning

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. Therefore, to qualify for a deduction under section 25-10 of the ITAA 1997 the expenditure must:

- be a repair

- not be expenditure of a capital nature; and

- be in respect of an asset used in the production of assessable income.

You can claim a deduction for certain expenses incurred for the period the property is rented or is available for rent. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes.

You may still be considered to hold a rental property for income purposes at the time of the repair even if it is vacant at that time. The cost of repairs to a property after cessation of income producing use is described in Taxation Ruling IT 180. Paragraph 4 of IT 180 states that a deduction may be allowed for the cost of repairs to the property providing:

- the necessity for the repairs can be related to a period of time during which the premises have been used to produce assessable income to the taxpayer,

- the premises have been used in the production of such assessable income of the year of income in which the expenditure incurred.

In your case, repairs for various structural deficiencies were undertaken after 200Y and as a result the repairs were not undertaken in the year the property was rented or available for rent. It is necessary to determine whether a nexus between the expenditure and the income earning activities still exists. We consider that the nexus has been broken, as the property has not been rented since 200Y and it is your intention not to continue to rent the property.

Capital works

Section 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

Section 43-10 of the ITAA 1997 requires that:

- the capital works has an area in which capital works is carried out, the work is begun after 30 June 1997, and the expenditure incurred is for capital works that are owned or leased by the taxpayer (section 43-75 of the ITAA 1997);

- there is an amount of construction expenditure incurred that is attributable to the capital works area (section 43-85 of the ITAA 1997); and

- the construction area must be used in a deductible way at some time during the year of income for the purposes of producing assessable income.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997).

In your case, you have incurred expenses for the following capital works in the relevant financial year on your rental property during the year of income producing:

- surveyor expenses

- soil testing

- permits, inspections and associated costs

- design, documentation and certification amendments

- supervision

Therefore you are entitled to a capital works deduction for the above items.