Edited version of your private ruling

Authorisation Number: 1012134622536

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Subject: rental property and financial plan expenses

Issue 1

Question

Can you claim the costs incurred for the replacement of part of the cladding of your rental property as a deduction?

Answer

Yes.

Issue 2

Question

Can you claim a deduction for the costs incurred for a new financial plan related to your superannuation?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Rental property

You have a rental property which is clad in a material which is very difficult to replace. The house is over 80 years old, and the cladding is difficult to maintain, with some parts needing replacing.

You intend to replace a small percentage of the total cladding material with cement sheeting and rendered or paint type finish. This is the modern equivalent of the existing material.

The work is not an initial expense.

Financial plan

You have paid to have an initial financial set up for future planning and allocation of superannuation funds.

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 25-10(3)

Reasons for decision

Rental property

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.

The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.

Taxation Ruling TR 97/23 indicates that expenditure for repairs to property is of a capital nature where:

· the extent of the work carried out represents a renewal or reconstruction of the entirety, or

· the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or

· the work is an initial repair.

In your case you are not renewing or reconstructing an entirety and the work you will undertake is not an initial repair.

Repair or improvement

Paragraph 45 of TR 97/23 distinguishes between a 'repair' and an 'improvement' to property and considers the effect that the work done on the property has on its efficiency of function.

If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property.

In your case, you are the owner of a rental property which has to have a small proportion of the cladding shingles replaced. You intend to replace the shingles with material which is the modern equivalent of the original. This will restore the property to its original condition, function and appearance.

The replacement of the shingles restores the property to its former appearance without changing its character. The expenditure incurred in doing this is deductible under section 25-10 of the ITAA 1997.

Fees to set up a financial plan

Section 8-1 of the 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.  

To determine whether a deduction is allowable for financial advisor fees under section 8-1 of the ITAA 1997, the nature of the expense must be considered. The nature or character of the financial advisor fees follows the advantage which is sought to be gained by incurring the expense. If the advantage to be gained is of a capital nature then the expense incurred in gaining the advantage will also be of a capital nature.  

Taxation Determination TD 95/60 deals with the issue of whether fees paid for obtaining investment advice are an allowable deduction for taxpayers who are not carrying on an investment business.  

TD 95/60 explains that a fee for drawing up a financial plan is not deductible for income tax purposes as it is not expenditure incurred in the course of gaining or producing the assessable income from the investments. It is too early in time to be an expense that is part of the income producing process as it is an expense that is associated with putting the income earning investments in place. Therefore the expense has an insufficient connection with earning income from the investments, and is considered capital in nature.  

In your case, you paid a fee to set up a financial plan for future allocation of superannuation funds. Fees paid for setting up a plan are considered to have been incurred at a point to soon as it is an expense incurred in putting the investment in place rather than in the course of earning income. Therefore the fee you paid is capital in nature and not deductible under section 8-1 of the ITAA 1997.

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