Edited version of private advice

Authorisation Number: 1052096500108

Date of advice: 14 March 2023

Ruling

Subject: Deductions - rentals

Question 1

Are the expenses you incurred in removing asbestos deductible under section 8-1 of the Income Tax Assessment Act (ITAA) 1997?

Answer

Yes.

Question 2

Are the expenses you incurred in Table 1 deductible as repairs under section 25-10 of the Income Tax Assessment Act (ITAA) 1997?

Answer

Yes.

Question 3

Are the expenses in Table 2 considered depreciable assets under section 40-25 of the Income Tax Assessment Act 1997 (ITAA)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In 20XX, you purchased a property.

The property is used solely for income producing purposes and has been rented out from when it was purchased up until XXXX 20XX, when the tenants advised that they were vacating the property and gave notice to leave.

A leak in the shower at the property was first reported in early 20XX.

You engaged the services of a tradesman who advised that the shower and the vanity would need to be replaced as it was likely that they would both be damaged when the shower was removed to fix the leak.

You were advised that the leak occurred due to the age of the fiberglass in the shower.

The tradesman also suggested that there may be asbestos in the walls which would need to be checked as it would be disturbed if the shower and vanity were removed as they were both constructed into the wall.

Asbestos specialists confirmed that there was asbestos in the walls and possibly in the ceiling.

The tradesman advised that the asbestos would need to be removed before any work on the bathroom could commence.

You decided to arrange for the asbestos to be removed due to it being an environmental health issue for the tradesman and the tenants in the property.

You received a quote for the bathroom to be repaired and proceeded with the quote so that the tenants could have their bathroom reinstated.

The previous tenants had rented the property for several years.

You decided to wait until the tenants had vacated the property to commence work on the bathroom.

You organised to have the asbestos removed which involved removing the ceiling and walls in the bathroom.

You then organised a new ceiling and walls for the bathroom as well as a new shower and vanity.

You also organised for the carpet in a nearby room to be removed due to it becoming stained and ripped throughout the repair process. You chose to replace the carpet with laminate.

The work in the bathroom was completed between XXXX and XXXX 20XX.

You consider the fixtures and fittings that were installed to be of a basic nature as you were trying to keep costs to a minimum.

The bathroom was of a reasonable condition before the repairs occurred.

The only repairs that had previously been done in the bathroom were repairs to the doors and shelves of the vanity. You considered replacing the vanity at this time however, as it was built into the wall, it was easier to repair.

You did not lodge an insurance claim for the expenses associated with fixing the bathroom.

You leased the property to tenants in XXXX 20XX.

You have incurred expenses in the 20XX-XX and 20XX-XX financial years for the following works:

Table 1: Expenses incurred in the 20XX-XX and 20XX-XX income years

Table 2: Expenses incurred in the 20XX-XX and 20XX-XX income years

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25

Income Tax Assessment Act 1997 Section 40-25

Reasons for decision

Question 1

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.

If you are preventing or fixing deterioration of an item that occurred while renting out your property, this is likely to be maintenance. For example, getting faded interior walls repainted or having a deck re-oiled. This should be claimed at the Repair and Maintenance area on the rental schedule of your tax return.

Work done to property in controlling health risks associated with the use of dangerous substances (such as asbestos, does not qualify as a 'repair' for the purposes of section 25-10 unless the work remedies or makes good defects in, damage to, or deterioration (in a mechanical or physical sense) of, the property.

Expenditure to control health risks associated with the use of dangerous substances that is not deductible under section 25-10 may be deductible under section 8-1 of the ITAA 1997.

In your case, the asbestos in the bathroom is being replaced because of the health risk it might pose to tenants or tradesman. Therefore, expenses associated with removing the asbestos are deductible under section 8-1 of the ITAA 1997.

Question 2

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction.

The term 'repair' means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated.

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.

The property was rented during the income years that you incurred the expenses. We are satisfied that the expenses listed in Table 1 are repairs and maintenance items involved in remedying the water leak of the shower, to restore the efficiency and function of the bathroom to its former state and are therefore allowable deductions under section 25-10 of the ITAA 1997.

These are the expenses you have incurred that would qualify as repairs and maintenance.

Table 1: Expenses incurred in the 20XX-XX and 20XX-XX income years

Question 3

Decline in value (Capital Allowances)

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that can reasonably be expected to decline in value over time it is used (section 40-30 of ITAA 1997).

Depreciating assets are those items that can be described as plant, which do not form part of the premises. These items are usually: separately identifiable; not likely to be permanent and expected to be replaced within a relatively short period and not part of the structure. Examples of assets that deductions for decline in value can be applied to include timber flooring, carpets, curtains, appliances like a washing machine or fridge and furniture.

The expenses listed in Table 2 are of a capital nature are not deductible as repairs or maintenance. These items include fixtures and fittings, along with items which we would also deem as improvements. Whilst they are not deductible as repairs or maintenance, these items can be claimed as a depreciable asset as outlined in section 40-25 of the ITAA 1997.

Immediate deduction for depreciating assets costing $300 or less

The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it to produce assessable income, including rental income, during the income year in which the deduction is available.

The immediate deduction is available if all of the following tests are met in relation to the asset:

•         it cost $300 or less n you used it mainly for the purpose of producing assessable income that was not income from carrying on a business (for example, rental income where your rental activities did not amount to the carrying on of a business of letting rental properties)

•         it was not part of a set of assets costing more than $300 that you started to hold in the income year, and

•         it was not one of a number of identical, or substantially identical, assets that you started to hold in the income year that together cost more than $300

Therefore, the expenses listed in Table 2 that are below $300 can be claimed as an immediate deduction.

Table 2: Expenses incurred in the 20XX-XX and 20XX-XX income years