Edited version of your private ruling

Authorisation Number: 1012443482673

Ruling

Subject: Rental property deductions

Questions and answers:

1. Are you entitled to an immediate deduction for a portion of your flight expenses?

No.

2. Are you entitled to an immediate apportioned deduction for car hire expenses?

No.

3. Are you entitled to an immediate deduction for smoke detectors costing $300 or less?

Yes.

4. Are you entitled to a capital works deduction for the installation of the new cistern?

Yes.

5. Are the travel expenses, maintenance and repairs carried out on your rental property capital in nature?

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You and X other people entered into a contract to purchase a property interstate as tenants in common in the relevant financial year.

You hold Y% of the property.

At the time of purchase the property was being let as a holiday rental.

Settlement occurred approximately two months later.

The estate agent notified you of problems with the fuses and these were repaired before a tenant moved in.

You were required to replace the toilet cistern to a dual flush system before a tenant moved in to enable you to charge water usage to a tenant.

Shortly after settlement one of the owners listed the property with a real estate agent on your behalf as being available for holiday rental.

One week later you flew interstate to inspect the property and to sign a long term rental agreement.

It was not possible to fly directly to the location of your rental property so you flew in to the capital city and hired a car.

While in the capital city you also spent some time catching up with family.

When you got to your rental property you carried out the following maintenance:

- cleaned the gutters and installed gutter guards to prevent further leaf build up;

- cleaned out leaf litter and timber from under the house and disposed of these;

- installed smoke detectors;

- painted the back doorstep as there was a step down which needed to be highlighted;

- replaced the showerhead as the old one did not work satisfactorily; and

- engaged a handyman to fix a loose plank on the back deck.

The property was available for rent at the time this maintenance was carried out, however a tenant had not been found.

Your arguments and references

You state that:

- The maintenance was not required in order for the property to be in a suitable condition to rent.

- The main purpose of the travel was to inspect the property, meet the real estate agent, familiarise yourself with the area, introduce yourself to some of the residents, sign the rental agency agreement and carry out some minor repairs.

- You expect that you should be entitled to claim half the airfares and a portion of the car hire expenses as a deduction.

The smoke detectors, new showerhead, paint and gutter guards all cost less than $300. Therefore as stated on page 16 of the Rental properties guide 2012 they are all assets costing less than $300 or less and should be immediately deductible.

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

Income Tax Assessment Act 1997 Section 110-25

Reasons for decision

Please note that all references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Section 8-1 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Section 25-10 allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) denies a deduction for repairs where the expenditure is of a capital nature.

The meaning of repairs

Taxation Ruling TR 97/23 Income tax: deductions for repairs, explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10. Generally, a 'repair' involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage to or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time.

Initial repair

Paragraph 72 of TR 97/23 states repair expenditure is deductible where it is incurred during the period the property is 'held, occupied or used' for bona fide income producing purposes and is attributable either to damage that occurs during income producing use of the property or to defects that emerge suddenly during that time.

However, expenditure incurred on an initial repair after the property is acquired, where the expenses are incurred in remedying defects or deterioration in existence at the time of purchase, is capital in nature. These expenses remain capital in nature even when some income is produced by the property prior to the initial repairs being incurred (paragraph 59 of TR 97/23).

Paragraphs 60 and 61 of TR 97/23 state that the main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency, when it is acquired.

Where expenditure remedies damage, defects or deterioration to the property which existed at the time of purchase of the property and did not arise from the income producing activity, the expenditure is capital in nature.

It is not material whether you were aware of the condition or the need for repair of the property at the time of purchase. Expenditure on initial repairs lacks a connection to the income producing activities of the property and are, an additional cost of acquiring the property or an improvement in the quality of the property you acquired.

You flew interstate and hired a car to inspect the property, meet the real estate agent, familiarise yourself with the area, introduce yourself to some of the residents, sign a rental agency agreement and carry out some minor repairs:

- cleaned the gutters and installed gutter guards to prevent further leaf build up;

- cleaned out leaf litter and timber from under the house and disposed of these;

- installed smoke detectors;

- painted the back doorstep as there was a step down which needed to be highlighted;

- replaced the showerhead as the old one did not work satisfactorily; and

- engaged a handyman to fix a loose plank on the back deck.

In addition the estate agent notified you of problems with the fuses and these were repaired before a tenant moved in. You were also required to replace the toilet cistern to a dual flush system before a tenant moved in to enable you to charge water usage to a tenant.

At the time of your visit the property had been placed on the market as available for rent however a tenant had not been found. Therefore the maintenance and repairs had resulted from damage, defects or deterioration to the property which existed at the time of purchase of the property and did not arise from any income producing activity that had occurred during your ownership.

We have determined that you cannot claim an immediate deduction under either section 8-1 or section 25-10 for the expenses incurred. The expenses are initial repairs to remedy an existing defect in the capital asset. You are not restoring the functional efficiency of an income producing asset where the damage or defect was caused by its income producing use.

The following general maintenance work you carried out will be included in the fourth element of the cost base of the property as they are an additional cost of acquisition:

- cleaned the gutters and installed gutter guards to prevent further leaf build up;

- cleaned out leaf litter and timber from under the house and disposed of these;

- painted the back doorstep as there was a step down which needed to be highlighted; and

- engaged a handyman to fix a loose plank on the back deck.

Smoke detectors

Work done to 'repair' property that also happens to meet the requirements of regulatory bodies is deductible under section 25-10. However, work done solely to meet requirements of regulatory bodies is not a 'repair' for the purposes of the section.

As it is a requirement that smoke detectors be installed and maintained in rental properties the cost of these can be depreciated over time.

Immediate deduction

Division 40 deals with deductions for the cost of depreciating assets. Section 40-25 allows you to deduct an amount equal to the decline in value of a depreciating asset which is held for any time during an income year and used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income.

If a depreciable asset costs less than $300 then the expense is immediately deductible in the income year in which the expense is incurred. 

You are entitled to an immediate deduction for the smoke detectors as these items are depreciable and cost less than $300.

New dual flush toilet cistern

You point out that you are to charge your tenant for water usage and therefore installed a dual flush toilet cistern. The cistern is a capital expense and a deduction can be claimed over a period of over 25 or 40 years. This is referred to as a capital works deduction.

Travel expenses

In relation to claiming travel expenses associated with your rental property, the ATO fact sheet entitled Rental properties - claiming travel expenses deductions (NAT 73029) advises the following:

You can claim travel expenses for:

· preparing the property for new tenants (except for the first tenants);

· inspecting the property during or at the end of tenancy;

· undertaking repairs, where those repairs are because of damage or wear and tear incurred while you rented the property out;

· maintaining the property, such as cleaning and gardening, while it is rented or available for rent;

· collecting the rent; and

· visiting your agent to discuss your rental property.

The fact sheet clearly states that travel expenses incurred when you are preparing the property for your first tenants are not allowed as an immediate deduction. Therefore your airfares and car hire expenses are not deductible on this occasion.

ATO Interpretative Decision 2003/772 (ATO ID 2003/772) Income tax capital gains tax: cost base - non income producing property - travel expenses - third element of cost base discusses travel expenses incurred where the purpose for undertaking the travel was to carry out maintenance on the property. If carrying out maintenance was incidental to another purpose, only those travel expenses directly attributable to the ownership of the property can be included in the third element of the cost base of the property under subsection 110-25(4).

You have incurred expenses for non-deductible initial repairs. As the expenses were incurred in relation to your rental property they will form part of the cost base of the rental property.