Edited version of private advice

Authorisation Number: 1052171374964

Date of advice: 20 September 2023

Ruling

Subject: Deductions - rental expenses

Question 1

Is the payment made for damp proofing walls and supplying water proofing membrane materials a deductible repair expense 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.

Question 2

Is the payment made for internal painting to attend to the areas affected by damp repairs a deductible repair expense under section 25-10 of the 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.

Question 3

Is the payment made for the internal painting to attend to wear and tear a deductible maintenance expense under section 8-1 of the ITAA 1997?

Answer

Yes. Expenses incurred that prevent or fix deterioration of an item that occurred while renting out your property for the purpose of producing assessable income are considered maintenance. Your expenses meet the requirements of section 8-1 of the ITAA 1997.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You purchased a property.

You are the sole owner of the property.

The property is a townhouse in a complex.

The property is held on a Strata Title.

From XX 20XX until XX 20XX the property was rented at market rates.

From XX 20XX until XX 20XX the property was your main residence.

From XX 20XX until currently, the property has continually been a rental property, rented at market rates.

In XX 20XX there was a flooding event at the property.

The Strata covered new drainage to address the flooding event.

There has been no flooding at the property from the point in which the drainage issue was addressed.

In 20XX your tenant advised of mould in a back wardrobe.

The mould was removed by cleaning.

In XX 20XX the mould reappeared and was cleaned.

In XX 20XX the mould reappeared and was larger in size.

On XX 20XX, your tenants moved out when their lease ended.

In XX 20XX tests were performed on the walls to determine if there were any damp issues.

The tests indicate that the damp issues in the townhouse were almost certainly caused by the flooding event which resulted in water seeping into brickwork and running along the internal cavities of the property.

You engaged contractors whilst the property was vacant to repair the damage.

The following works were undertaken:

•         Render stripped back on sections of the wall

•         Removal of lowest layer of bricks and vacuum out of cavity

•         New water proofing membrane laid to stop future damp from rising

•         The bricks that were removed were dried and were re-bed

•         Higher sections of the affected walls had new water proofing membrane added

•         All sections of the affected walls were re-rendered

•         Once the re-rendered walls had dried, you engaged a contractor to fill holes and cracks, and paint

•         The contractors painted internal walls, ceilings, doors, frames, and skirting

•         Some of the painting was to repair wear and tear by the tenants

•         Most of the internal painting was to the repaired walls affected by damp repairs

As soon as the works were completed the property was immediately advertised for rent.

The property was either tenanted or available for rent during the financial year that the works were completed.

On XX 20XX, new tenants moved into the property.

The property has remained a rental property following the completion of the damp repairs.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Detailed reasoning

General deductions

Under section 8-1 of ITAA 1997 you can deduct 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. You have rental income and can claim certain rental expenses as a deduction.

Subsection 25-10(1) of the ITAA 1997 allows a deduction for the cost of repairs to premises, or a part of the premises, used solely for income-producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs that are considered capital expenditure. Division 43 of the ITAA 1997 allows deductions for capital works expenditure.

The following are examples of expenses which are capital expenditure or of a capital nature:

•         replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator),

•         improvements, renovations, extensions, and alterations, and

•         initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

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

Repair expenses

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.

Application to your situation

The property was rented during the income year that you incurred the expenses. The work completed inside and outside of the property are considered repairs as they rectified the damages caused by the operation of natural causes during the passage of time. The damp repairs restored the efficiency of function of the property without changing its character.

We are therefore satisfied that the expenses relating to the repair of the damp and the internal painting required to attend to the areas affected by damp repairs, are deductible expenses under section 25-10 of the ITAA 1997?

Maintenance expenses

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.

Paragraphs 92 to 95 of TR 97/23 further consider when maintenance, or work done in anticipation of forthcoming defects or deterioration can be considered a repair if it is done in combination with work of rectification see the BP Oil Refinery (Bulwer Island) Ltd case at 92 ATC 4039; 23 ATR 73. As initially discussed at paragraph 20 of TR 97/23 Oiling, brushing or cleaning something that is otherwise in good working condition and only requires attention to prevent the possibility of its going wrong in the future, is not 'repairs' in terms of section 25-10: compare London & North Eastern Ry. Co. v. Berriman [1946] 1 All ER 255 at 267 and the BP Oil Refinery(Bulwer Island) Ltd case. (The cost of these operations may be deductible under section 8-1.)

Application to your situation

The internal painting of areas within the property affected by wear and tear from the tenants, such as painting the ceilings, are maintenance expenses. They keep the property in a tenantable condition and includes work to prevent deterioration or to fix existing deterioration.

We are therefore satisfied that the expenses relating to the internal painting are deductible expenses under section 8-1 of the ITAA 1997. This should be claimed at Repair and Maintenance on the rental schedule.