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Ruling
Subject: Rental deductions
Question 1
Are you entitled to an outright deduction for the expenditure incurred in building a wall at your rental property?
Answer
No.
Question 2
Are you entitled to a 2.5% capital works deduction with respect to the wall?
Answer
Yes.
Question 3
Are you entitled to a decline in value (depreciation) deduction with respect to the wall?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
Previous tenants of your rental property complained of the traffic noise.
You had a wall constructed at the front of your rental property to defray some of the traffic noise and make the house more appealing to potential tenants.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 25-10
Income Tax Assessment Act 1997 Subsection 40-45(2).
Income Tax Assessment Act 1997 Section 43-10.
Income Tax Assessment Act 1997 Section 43-20.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings 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.
Where expenditure in relation to a rental property is capital in nature and therefore not allowable as an outright deduction under sections 8-1 or 25-10 of the ITAA 1997, a deduction spread over time may be available. This may be a capital works deduction under Division 43 of the ITAA 1997 or a decline in value (depreciation) deduction under Division 40 of the ITAA 1997.
In your case, the work undertaken was to alleviate a problem of noise by adding a wall to your rental property. The work is not to repair or replace a part of something or correct something that is already in existence which has become worn out or dilapidated. Rather the work provided for an addition to the property. Therefore, the work done is capital in nature. Consequently, a deduction is not allowable under either section 25-10 or section 8-1 of the ITAA 1997.
However, the wall is a structural improvement that qualifies for a 2.5% capital works deduction under Division 43 of the ITAA 1997.
Subsection 40-45(2) of the ITAA 1997 states that Division 40 of the ITAA 1997 does not apply to capital works that qualify for a capital works deduction. Therefore, a decline in value deduction under Division 40 is not allowable.