Edited version of your written advice

Authorisation Number: 1012715099695

Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for the following:

• repairs to guttering and down pipes

• painting

• repairs to deck

• land tax, council rates, building insurance

• replanting the front garden

Answer

Yes.

Question 2

Are you entitled to a deduction for the decline in value of carpets and window coverings?

Answer

Yes.

Question 3

Are you entitled to a deduction for capital works for the cost of replacing the path?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2013

Relevant facts

You have owned a rental property since 200X.

When the tenant moved out in 20XX, you commenced doing work on the property which included:

• Replacing guttering and down pipes,

• Painting inside and outside

• Replacing carpets

• Replacing window coverings

• Repairs to the deck

• Removing the broken concrete path from the gate to the house and replacing with pavers over a concrete base.

• Replanting the front garden

You have incurred costs for land tax, council rates, building insurance

You did not receive any rent during the 2013-14 financial year.

You expect the work to be completed and the property to be available for rent in 20YY.

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 43-10

Reasons for decision

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, or relate to the earning of exempt income.

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes.

Section 40-25 of the ITAA 1997 states that you can deduct an amount for the decline in value of a depreciating asset you hold to the extent that you use it for a taxable purpose. The effective life starts when you begin to use the asset or have it installed ready for use.

Section 43-10 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

Taxation Ruling TR 97/23 Income tax: deductions for repairs, 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.

Paragraph 38 of TR 97/23 explains that a property is more likely to be an entirety if:

• the property is separately identifiable as a principal item of capital equipment; or

• the thing or structure is an integral part, but only a part, of the entire premises and is capable of providing a useful function without regard to any other part of the premises; or

• the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

• the thing or structure is a unit of property as that expression is used in the depreciation deduction provisions of the income tax law.

The principles in relation to the deductibility of expenses incurred in gaining or producing assessable income have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals.

It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's case), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production.

While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including rates, insurance and interest.

Taxation Ruling TR 2004/4, in considering the above decision, 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 this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future.

In your case, you have held the rental property for a number of years and it has been continuously rented during that time. You undertook repairs and renovations. You did not rent the property during the year because of the work being undertaken. However, as soon as the work is completed, you will again rent the property.

The expenses are not considered to be too soon; are not private or domestic; was not too long; there was one end in view and you made continuing efforts. Therefore, you are entitled to a deduction for holding expenses including rates, insurance and interest. You are also entitled to a deduction for the cost of repairs.

In your case, you are entitled to an immediate deduction for repairs to the guttering and down pipes, painting, repairs to the deck, land tax, council rates, building insurance and replanting the front garden.

You are entitled to a deduction for the decline in value of the carpets and window coverings from the time the assets were installed ready for use.

Removing the broken concrete path and replacing with concrete base with pavers over the top is considered to be an improvement rather than a deductible repair as the work undertaken is a renewal of an entirety. Therefore, you are entitled to a deduction for the capital works for the cost of replacing the path.