Edited version of private ruling

Authorisation Number: 1011754287601

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Ruling

Subject: Rental property expenses

Question

Are you entitled to a deduction for repairs to a rental property where the expenditure was incurred in the financial year after the property ceased being income producing?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You own a property which you rented out for several years before you decided to move into it near the end of the 2009-10 financial year.

The property required repairs due to damage that your tenants had left.

You were unable to repair the property before 30 June 2010 and before the tenants vacated as:

· the tenants refused entry to the premises,

· contractors refused to work while tenants were on the premises,

· real estate agents were reluctant to take responsibility for coordinating some of the work, and

· you were unable to coordinate the work as you lived and worked in a remote area.

You paid the majority of the repairs and maintenance for the property during the first few months of the 2010-11 financial year.

Reasons for decision

Summary

Taxation Ruling IT 180 states that a deduction for repairs after a property ceases to be income producing is only allowable where the damage was caused while the property was rented and the property was available for rent during the financial year in which the repair expenditure was incurred.

As your property ceased to be income producing during the 2009-10 financial year, the expenditure for repairs that you incurred during the 2010-11 financial year is not deductible.

Detailed reasoning

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to a rental property.

To be eligible to claim such an expense you must be holding the property for the purpose of gaining or producing assessable income, and the expenses must not be capital in nature.

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

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 covered in IT 180. Paragraph 4 of IT 180 states that a deduction may be allowed for the cost of repairs to 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 of the taxpayer, and

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

In your case, the property had been rented for several years until towards the end of the 2010 year. It is accepted that the necessity for the repairs was attributable to the period that the property was being used to produce rental income for you. However, the property is no longer income producing as you are now using the property as your main residence.

A deduction for repairs will only be allowed if the property has been used for the production of assessable income during the year in which the expenditure is incurred.

In your case, your property ceased being an income producing asset during the 2009-10 financial year. However, the majority of the repairs and maintenance expenses were paid in the 2010-11 financial year.

In applying the principles expressed in IT 180, these expenses where not incurred during a time when your property was being used for the production of assessable income. Therefore, the expenditure incurred in relation to the repairs is not considered an allowable deduction under section 25-10 of the ITAA 1997.