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Ruling

Subject: Rental property expenses

Question 1

Are you entitled to claim a deduction for rates and insurance in respect of your rental property in the 2011-12 financial year?

Answer

Yes

Question 2

Are you entitled to claim a deduction for a pest inspection in the 2011-12 financial year?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

Your rental property was tenanted until the 2010-11 financial year. You subsequently undertook substantial repairs to the property and obtained a pest inspection. You undertook much of this work yourself.

The repairs were completed approximately seven months after they were commenced and the property became available for rent from that date. You obtained a new tenant before the end of the 2011-12 financial year.

You incurred expenses of rates, insurance and a pest inspection during the 2011-12 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Section 25-10.

Reasons for decision

Question 1

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.

It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) 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 Steele's Case deals with the issue of interest, the principle extends to other types of expenditure including local council, water and sewage rates, land taxes and emergency services levies.

Your expenses are incurred with regard to property that has been used and is to be used solely for income producing purposes. The expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity.

There is no private or domestic purpose for holding the property, your intention was always to advertise for a tenant once the repairs were completed, and a tenant was found to occupy the property several months later.

The length of time between the previous tenant vacating and the completion of the repairs is not considered to be so long that the necessary connection between the outgoings and the assessable income is lost. You undertook fairly substantial repairs and completed most of the work yourself over a period of approximately seven months.

In these circumstances, you are entitled to a deduction for your expenses of local council rates and insurance in the 2011-12 financial year.

Question 2

Section 25-10 of the ITAA 1997 allows a deduction for repairs to a property that you held or used solely for an income producing purpose. Pest inspection reports are considered to fall within the definition of repairs according to Taxation Ruling TR 97/23 as this work was done to prevent damage or deterioration of the property.

In your case, your rental property was held for no other purpose than to be returned to an income producing state. You are therefore entitled to claim a deduction for the pest inspection in the 2011-12 financial year.