Edited version of private advice

Authorisation Number: 1051776742827

Date of advice: 6 November 2020

Ruling

Subject: Work related expenses and rental property deductions

Question 1

Are you entitled to a deduction for the purchase of noise cancelling headphones in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are the works completed on the roof for your rental property a deductible repair as per section 25-10 of the ITAA 1997?

Answer

Yes. The Commissioner accepts that the works completed meets the requirements detailed in Taxation Ruling TR 97/23 Income tax: deductions for repairs. More information on rental property expenses is available by typing QC 23633 into the search bar on our website ato.gov.au.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are employed as software engineer.

You work in an open plan office with other employees.

These employees talk loudly making it difficult for you to concentrate on your employment duties.

You purchased noise cancelling headphones to wear at work.

You own a property (the property).

You purchased the property and the property was your main residence.

On the XXXX the property was made available for rent.

You have declared this income on your income tax returns.

On the you were invoiced for the following roofing works:

•         Replace all broken rooftiles and fittings.

•         Repair remove valley cut tiles, clean away silicone.

•         Install valley security clips to all fallen or slipped valley cut tiles.

•         High pressure roof wash roof prep.

•         Restore roof using a X coat membrane system.

•         X coat anti mould fungal treatment.

•         X coat high build primer sealer.

•         X coats roof membrane in colour of choice.

•         Clean prep paint gutters and fascia 3 coat system.

•         Coat X tiles and leave for future spaces.

The works cost $XXXX to complete.

The property was tenanted at the time the works were completed.

You are unable to provide a copy of the building inspection report obtained when you purchased the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Work related expenses

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.

Taxation Ruling TR 2020/1 Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997 (TR 2020/1) sets out when an employee can deduct a work expense under section 8-1 of the ITAA 1997.

Whether an expense is incurred in gaining or producing assessable income is discussed at paragraph 13, of TR 2020/1, which states:

13. The pivotal element of section 8-1 for work expenses is the requirement that expenses be incurred 'in gaining or producing assessable income'. The High Court majority in Payne said it is well established that these words are to be understood as meaning incurred 'in the course of' gaining or producing assessable income, and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income.

And further, at paragraphs 22 and 23:

22. The requirement that expenses be incurred in the course of producing assessable income means that it is not enough to show only that there is some general link or causal connection between expenditure and the production of income. The expenditure must have a sufficiently close connection to performance of the employment duties and activities through which the employee earns income.

23. Accordingly, in some cases, expenditure would be regarded as too remote from the income-earning activities or incurred only as a prerequisite to earning income, and not incurred in the course of producing that income.

TR 2020/1 also discusses the relevance of employer requirements, at paragraphs 26 and 27:

26. A common issue relating to the deductibility of employee expenses is the relevance of express or implied conditions of employment. In this regard, a question that frequently arises is whether an expense becomes deductible merely because an employer specifically requires the employee to incur the expense.

27. In these circumstances, the employer's requirements do not determine the question of deductibility. This question is always to be answered by reference to the statutory test which involves an objective determination of the connection between the expense and the employee's income-earning activities.

In your case, you have purchased noise cancelling headphones to allow you to block out noises at your place of employment to assist you concentrate and perform your employment duties.

The costs incurred for the headphones has a general link or casual connection to your income producing activities, the expenditure is too remote from your actual income producing activities as a software engineer and therefore not deductible under section 8-1 of the ITAA 1997.

Rental property repairs

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains the circumstances in which deductions for repairs are allowable.

TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property.

The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

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.

Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time.

TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.

In your case, the works completed on the roof of the property were to replace a part of something or corrects something that is already there and has become worn out or dilapidated. No improvements were performed to the property, and the property remained tenanted at the time of the works.

Therefore, a deduction is allowable for the works performed on the roof of the property as a repair in accordance with section 25-10 of the ITAA 1997.

Apportionment of expenses

If you are a joint owner of the property, only the relevant portion in relation to your share of ownership in the property is an allowable deduction.