Edited version of private advice

Authorisation Number: 1052044135084

Date of advice: 18 October 2022

Ruling

Subject: Rental property repair expenses

Question 1

Can you deduct the repair expenses incurred in the 20XX income year for your rental properties in Country A under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can you deduct the repair expenses incurred in the 20XX, 20XX and 20XX income years for your rental properties in Country A under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Can you deduct the repair expenses incurred in the 20XX, 20XX and 20XX income years for your rental properties in Country A under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased a two-story house in Country A.

The house comprises two self-contained dwellings, each on a separate title.

You purchased the dwellings before 20XX.

You are the sole owner of both dwellings.

Both of the dwellings have been rented out continuously since 20XX to tenants at arm's length for the market rate of rent recommended by the real estate agency you have engaged to manage the property.

One dwelling was rented to long term tenants and the other was rented as short stay accommodation.

In 20XX it was discovered that the timber framing of the house had extensive dry rot throughout much of the structure and would require repair works to be undertaken in the bathroom, kitchen, stairway bedroom, and rear entrance hallway.

The Country A Government's health and safety standards for rented homes state that dry rot is a health hazard and must be repaired in rental properties immediately upon its discovery.

You engaged contractors to conduct the following works on the properties:

For all affected areas:

• Remove internal claddings and fixtures
• Install supports to allow removal of affected structural timbers
• Replace affected timbers with new fungicide-treated timbers
• Treat existing timbers with fungicide
• Repair stonework and masonry
• Install damp-proof materials
• Install new insulation and sound deadening material
• Install new timber flooring and internal linings as required
• Install new foil-backed plasterboard
• Replace fixtures

The extent of the rectification works rendered the dwellings uninhabitable for the duration of the repairs.

The existing tenants were forced to vacate for the repairs to take place.

These works started in the 20XX financial year and continued until 20XX financial year.

The cost of the work done over this period was close to AUD $XXX.

You had intended to rent the properties again upon completion of the required repairs.

Due to COVID you were unable to engage tradesmen to complete the works required.

The properties have not been tenanted since the repair works commenced.

You have not used the properties for any private or other purpose since 20XX and your sole purpose in owning the dwellings since that time has been to produce assessable income.

You decided to sell the properties due to the inability to complete the repairs required to allow you to use the properties to produce income.

You have decided to sell the properties in an unfinished state.

You have found a buyer who has agreed to purchase both properties and have stated that you expect to achieve an imminent sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 25-10 of the ITAA 1997 provides that expenditure incurred for repairs to premises held or used solely for the purpose of producing assessable income shall be deductible in the year in which the expenditure was incurred. The taxation ruling TR 97/23 - Income tax: deductions for repairs clarifies that to be deductible under section 25-10 of the ITAA 1997, the repair expenses must not be capital in nature, nor should they be incurred in improving the asset nor renewing the asset in its entirety.

Section 25-10 of the ITAA 1997 allows repair costs of a rental property to be deducted to the extent that the repairs relate directly to a period in which the property is used for income producing purposes. The taxation ruling IT 180 - Repairs to property carried out after cessation of income production clarifies that this applies even to repairs which are undertaken after the cessation of income production, providing that the necessity for the repairs can be related to the period of income production, and that the property has produced assessable income during the year in which the expenditure was incurred.

Section 8-1 of the ITAA 1997 provides that losses or outgoings are deductible to the extent that they are incurred in the gaining or production of assessable income.

Application to your circumstances

The repairs undertaken to remedy the dry rot damage at the rental property were not a renewal of any entirety, nor were they an improvement of the premise nor can the expense be characterised as an outgoing of a capital nature. Therefore, it is accepted that the nature of the expenditure was that of rental repairs as explained in TR 97/23.

The dwellings at the rental property were used to produce income during the 2018 income year, therefore expenses incurred in this year are deductible in that year under section 25-10 of the ITAA 1997.

Because IT 180 stipulates that outgoings shall only be deductible in a year in which the property has produced assessable income, expenses incurred in the 20XX, 20XX, and 20XX income years will not be deductible under section 25-10 of the ITAA 1997.

However, it is recognised that these expenses were incurred in the gaining or producing of assessable income, as the intention to gain assessable income from the properties had not changed at the time these expenses were incurred. Therefore, repair expenses incurred in the 20XX, 20XX and 20XX income years are deductible under section 8-1 in the year in which the expenses were incurred.