Edited version of private advice

Authorisation Number: 1051783874232

Date of advice: 24 November 2020

Ruling

Subject: Rental deductions

Question

Are the expenses to rectify the leaking balcony an allowable deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the expenses are deductible under section 25-10 of the ITAA 1997, which provides that expenditure incurred for repairs to any premises held or used for the purpose of producing assessable income are an allowable deduction, subject to any apportionment for the private use of the property, and in accordance with Taxation Ruling TR 97/23 Income tax: deductions for repairs.

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You purchased a holiday rental property during the year ended 30 June 2012.

A dwelling was constructed on the property at some time between 2008 and 2011.

No pre-purchase inspection of the property was undertaken.

The property was first made available for rent in September 2011 and has been made available for rent on a continuous basis since that time.

The property manager suggested the rental rate for the property based on several factors including the holiday market in the surrounding areas, the nature of the season (eg peak or off-peak) and the guest capacity of the property.

The property manager charges a 20% commission for their property management services.

The property is always available for rent throughout the income year. Any private stays are outside of guest bookings.

During the year ended 30 June 2020 you incurred expenses in relation to a leaking balcony for the property.

You are not registered for GST.

You and your spouse attend the property periodically to conduct general repairs and maintenance. You stay at the property with your spouse while these repairs and maintenance activities are conducted.

Guests staying at the property incur a cleaning charge that is approximately 25% of the rental fee.

You engage a cleaning service contractor to complete the following tasks:

•         General cleaning, putting away dishes;

•         Wiping down the fridge, stovetop, benches, table, door handles and light switches;

•         Emptying the dishwasher;

•         Sweeping and mopping the floors

•         Vacuuming carpet and rugs;

•         Cleaning toilets, showers and vanity;

•         Removal of rubbish; and

•         Checking for any damage to the property and whether any personal items were left by guests.

The maintenance activities you and your spouse conduct are over and above the tasks completed by the cleaning service.

In 2016 you and your spouse observed water was dripping from the downstairs bedroom ceiling. At the time you also observed some walls of the property were damp.

You cut a hole in the ceiling to determine the source of the water damage.

You concluded that the damage was likely to be originating from the external upstairs balcony and accompanying tiled external wall above the bedroom.

You re-grouted and resealed the tiles on the external walkway.

These repairs only temporarily corrected the leak.

In the year ended 30 June 2019 the property manager informed you that:

•         Following heavy rains water was dripping from the ceiling in the downstairs bedroom;

•         The downstairs bed was sodden; and

•         Future guest booking would need to be diverted to other properties.

You then sought advice from a qualified builder.

The builder and the property manager concluded the property was uninhabitable without the necessary repairs being undertaken.

The Property was unavailable for rent for a 5-month period during the year ended 30 June 2020 due to the necessary repairs.

You incurred expenses in the year ended 30 June 2020 for the repairs.

The work undertaken included:

•         The removal of all existing balcony tiles and cement sheeting from the balcony joists;

•         The fitting of new substrate material, including the fitting or flashing, sealing of joins;

•         Repair and replace existing flashings;

•         Ensuring that the balcony was primed and waterproofed in accordance with Building Code requirements;

•         Tiling and sealing the balcony.

•         Making good all render.

•         Repairing and repainting plaster in the bedroom.

•         Removing all rubbish and spoils;

•         New shelf and ceiling in wardrobe;

•         Additional painting in shower cubicle;

•         Existing balcony posts and wire re-installed.

The balcony repairs and associated works were done to make good damage to the property through normal wear and tear, damage to the property, whether deliberate or accidental or by the operation of natural causes during the passage of time. The repairs did not constitute an improvement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10