Edited version of private advice

Authorisation Number: 1051630141539

Date of advice: 13 February 2020

Ruling

Subject: Rental deductions

Question 1

Am I eligible to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for owner's corporation fees, water charges, council rates and landlord'sinsurance incurred for a rental property in the 2018- 2019 income year?

Answer 1

Yes. 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, or relate to the earning of exempt income.

It is not necessary that expenditure should produce assessable income in the same year in which the expenditure is incurred.

TR 2004/4 - Taxation Ruling 2004/4- Income Tax: deductions for interest incurred prior to the commencement of, or following the cessation of relevant income earning activities (TR 2004/4) considered the decision Steele v FC of T (1999) 197 CLR 459 (Steele's case). Although Steele's case related to the deductibility of interest expenses, the same principles can be applied to other types of expenditure including council rates.Steele's case concluded 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:

a)     The interest is not incurred too soon, is not preliminary to the income earning activities, and is not a prelude to those activities

b)     The interest is not private or domestic

c)     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,

d)     The interest is incurred with one end in view, the gaining or producing of assessable income, and

e)     Continuing efforts are undertaken in pursuit of that end

Expenses relating to a rental property are allowable as deductions, but only for the period the property was rented or genuinely available for rent. Based on information provided, your rental property was genuinely available for rent at the time the expenses were incurred

You are therefore able to claim the owner's corporation fees, water charges, council rates and landlord's insurance incurred for a rental property in the 2018- 2019 income year

Question 2

Am I able to claim deductions for land tax, council rates, capital allowances (depreciation on plant) and capital works deductions (special building write -off) for a property at XXXX for the income year ending 30 June 2019?

Answer 2

No. You are not eligible to claim an immediate deduction for land tax and council rates. To be able to claim an immediate deduction for expenses incurred in relation to a rental property, the property must be either: genuinely available for rent or actually rented out.

In this situation, the property was neither available for rent nor actually rented out during the period when the land tax and council rates amounts were incurred and paid. The expenses are therefore not eligible for an immediate deduction.

You are able to claim deductions for capital allowances (depreciation on plant) and capital works deductions (special building write - off) during the time a property is rented out or genuinely available for rent. As Property 2 ceased to be available for rent from XXXX 2018, you are unable to claim deductions from this time onwards.

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You own a property at XXXX (Property 1). You finished renovating the Property in 2019.

Property 1 was available for rent from XXXX 2019. Property 1 was rented out from on or about XXXX 2019.

In the income year ending 30 June 2019 and after Property 1 was available for rent, you pre-paid council rates, water and owner's corporation fees. You also paid landlords' insurance for Property 1 in the income year ending 30 June 2019 and after the property was available for rent. All of these amounts were paid in the income year ending 30 June 2019.

You also owned a property at XXXX (Property 2). This property was rented until XXXX 2018. On XXXX 2018, you accepted a contract note for the sale of Property 2. Settlement occurred on XXXX 2018. You paid council rates of $XXX in XXXX 2018. You also paid land tax of $XXX on XXXX.

Property 2 was rented out for the majority of the income year ending XXXX 2018. It was not rented out or available for rent for any of the income year ending 30 June 2019. Your individual income tax return for the income year ending 30 June 2019 has been prepared but not yet lodged.

In that return you have included deductions for capital allowance (depreciation on plant) and capital works (special building write-off) apportioned until the time the contract note was signed on XXXX 2018.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 110-25(4)

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43