Edited version of private ruling

Authorisation Number: 1011643892269

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Ruling

Subject: Rental property expenses

1. Are you entitled to a deduction for holding expenses, repairs, travel and ongoing decline in value and capital works relating to your rental property in the year when it was not rented?

Yes.

2. Are you entitled to a deduction for capital works and decline in value relating to the work done from the completion date?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You have owned a rental property for more than 10 years.

As the result of damage caused from a tenant, you undertook repairs. You also made additional renovations.

During the income year, you did not rent the property and the only income received from it was back rent from the previous tenant. The property became rented soon after the work was completed.

You incurred travel expenses to inspect the work being done.

The length of time taken to complete the work was attributed to difficulty in finding a tradesman who would do the work.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 43-10

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (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, or relate to the earning of exempt income.

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes.

Section 40-25 of the ITAA 1997 states that you can deduct an amount for the decline in value of a depreciating asset you hold to the extent that you use it for a taxable purpose. The effective life starts when you begin to use the asset or have it installed ready for use.

Section 43-10 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. However, section 43-30 of the ITAA 1997 states that you cannot deduct an amount for any period before the completion of construction of the capital works even though you used them, or part of them, before completion.

The principles in relation to the deductibility of expenses incurred in gaining or producing assessable income have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals.

It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. In Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's case), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production.

While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including rates, insurance and interest.

Taxation Ruling TR 2004/4, in considering the above decision, concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances:

· the interest is not incurred too soon, is not preliminary to the income earning activities, and is not a prelude to those activities

· the interest is not private or domestic

· the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost

· the interest is incurred with one end in view, the gaining or producing of assessable income, and

· continuing efforts are undertaken in pursuit of that end. While this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future.

In your case, you have held the rental property for a number of years and it has been continuously rented during that time. During the 2009-10 income year, you undertook repairs and renovations. You did not rent the property during the year because of the work being undertaken. However, as soon as the work was completed, you have again rented the property.

The expenses are not considered to be too soon; are not private or domestic; was not too long; there was one end in view and you made continuing efforts. Therefore, you are entitled to a deduction for holding expenses including rates, insurance and interest. You are also entitled to a deduction for the cost of repairs and travel.

In relation to the existing depreciating assets, it is considered that they are installed ready for use and continue to be used in that manner.

In relation to the existing capital works, the construction has been completed.

Therefore, you are entitled to a deduction for decline in value and capital works for the existing assets and building.

However, in respect of the decline in value for the work undertaken during the year, you can only start to claim from the time the assets were installed ready for use and in respect of the capital works, you can only claim from the completion date.