Edited version of private advice

Authorisation Number: 1052133279660

Date of advice: 6 July 2023

Ruling

Subject: Rental deductions - repairs

Question 1

Are the costs you incurred in the 20XX - 20XX financial year to conduct repairs at 'the XXXX' deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes - these expenses were incurred at a time the rental property was tenanted or is considered to have been genuinely available for rent.

Question 2

Are the costs you incurred in the 20XX - 202XX financial year to conduct repairs to the XXXX, while it was uninhabitable and untenanted, deductible under section 8-1 of the ITAA 1997?

Answer

No.

This private ruling applies for the following period:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Your partner passed away on X September 20XX.

The XXXX was passed to you per the deceased's will.

The estate had been incurring the costs of repairs and related expenses to maintain the XXXX, which was tenanted at the time.

In May 20XX, the tenants moved out of the XXXX due to ongoing issues that required repair.

The work conducted at the XXXX to establish it as habitable include:

•         General repairs

•         The purchase and installation of water tank and accessories

•         Pest inspection and control

•         Supply and installation of advanced blower system

•         Installation of water filter

•         Land crusher

•         Crusher dust

•         Supply, delivery, and application of granite

•         Electrical works

•         Antenna supply and repairs

•         Tree removal services

•         Pressure pump repairs

•         Cleaning services

•         Sewerage system design.

The Estate advised you that they would no longer incur the expenses relating to the rental XXXX.

You incurred the total cost of repairs.

Some of the incurred costs occurred in the 20XX-20XX financial year.

The remainder of the incurred costs occurred in the 20XX-20XX financial year.

The XXXX was vacant at the time of the remainder of repairs and not fit for tenancy until they were completed.

The XXXX was not habitable until December 20XX.

You were able to rent the XXXX out in May 20XX through a private rental agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Summary

Expenses relating to a rental property are allowable as deductions, but only for the period the property was rented or genuinely available for rent.

Detailed reasoning

Under section 8-1 of the ITAA 1997 you can claim a deduction for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are of a capital, private or domestic nature.

Section 25-10 of the ITAA 1997 outlines that you can deduct expenditure you incur for repairs to premises (or part of a premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income. 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.

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.

Paragraph 145 of TR 97/23 explains that "a deduction is allowed for expenditure for repairs to property held, etc., for income purposes. Expenditure incurred in repairing property is not deductible if the property is not held, etc., nor ever has been held, etc., for income purposes".

Paragraph 146 goes on to explain that "repair expenditure, incurred by a taxpayer in a year of income on property held, etc., in earlier years of non-income purposes, can qualify for deduction under section 25-10 if the property is held, etc., for income purposes when the repair expenditure is incurred".

Example 16 at paragraph 182 of TR 97/23 states 'Mary-Ellen Walton, after the death of her spouse, decided to move out of the long-held family home and to rent it to tenants. She leaves the property on 15 July 1996. To make it more attractive for prospective tenants, Mary-Ellen undertakes major repairs and renovations to the house between August 1996 and February 1997. She places the house in the hands of a real estate agent on 15 March 1997 and lets the house to tenants on 1 April 1997. The costs of the repairs and renovations are not deductible under the old law. When the costs were incurred, Mary-Ellen was not holding or using the house to produce rental income. The costs are an expense in preparing the house for producing rent. They are of a capital nature.'

You incurred the costs of various repairs relating to the XXXX between May 20XX and December 20XX. The XXXX had previously been tenanted but as of July 20XX, the property was vacant and not considered to be genuinely available for rent.

Based on information provided, the property was neither available for rent nor actually rented out during the period when all other expenses were incurred and paid. Therefore, only the costs incurred in the 20XX-20XX financial year, are eligible for an immediate deduction.