Edited version of private ruling

Authorisation Number: 1011720136402

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Rental property expenses

Question 1

Are you entitled to claim decline in value of furniture and white goods from the date you purchased them?

Answer

No.

Question 2

Are you entitled to claim decline in value of furniture and white goods from the date the property became available for short term holiday rent?

Answer

Yes.

Question 3

Are you entitled to a deduction for holding and repair costs during the period you were refurbishing the property?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You and your spouse jointly own a property which has been rented to long term tenants since purchase in 2008.

The tenants vacated in 2010 and you decided to change from renting the property long term to short term holiday rental.

To allow you to do this, you have refurbished the property with new furniture and white goods. You also carried out repairs and painting over a period of five to six months.

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

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.

Section 25-10 of the 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.

In Steele v. FC of T (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. It follows from Steele's Case 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 Steele's Case deals with the issue of interest, the principles can also be applied to other types of expenditure including local council, water and sewage, rates, land taxes and emergency services levies.

In your case, you have an investment property which was unavailable for rent for a number of months while you undertook repairs and refurbishment prior to re-renting the property.

As the property has remained an investment property during the repairs and refurbishment period, holding costs such as interest and rated, for example, are deductible in the year they were incurred.

Decline in value

Division 40 of the ITAA 1997 allows a deduction equal to the amount of the decline in value for an income year of a depreciating asset held at any time during the year. This deduction is referred to as a capital allowance deduction, is only available to the extent that the depreciating asset is used for a taxable purpose, and is generally claimed over a number of years, depending on the effective life of the asset.

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.

In your case, you are entitled to a deduction for the decline in value of depreciable items from the date when you had the items installed ready for use, which is considered to be when the property became available for rent at the end of the refurbishment period.