Edited version of private advice

Authorisation Number: 1052182914194

Date of advice: 26 October 2023

Ruling

Subject: Rental property deductions - genuinely available to rent

Question

Can you claim the strata fees and council rates you pay for your holiday cabins in the 2022-23 financial year as deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Financial year ending 30 June 2023

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You bought cabins in a recreational park in a prior financial year. When you purchased the cabins, you intended to rent each one for a short-term or holiday rental basis. Conditions, set by the strata plan, prevented you from entering into a lease for your cabins unless they were advertised through the on-site manager nominated in your purchase agreement.

The on-site managers, nominated in that agreement, have not renewed the registration required to advertise your cabins as available to rent under the NSW Property and Stock Agents Act 2002. They cannot legally advertise your cabins as available to rent and have prevented anyone else taking on that role.

This means that although you are willing to advertise the accommodation as available for rent you cannot legally rent the cabins out yourself and have not advertised the accommodation as available in the relevant financial year. The cabins have not been rented out and have not generated any income.

You have asked if you can claim deductions for the strata fees and council rates you pay for the cabins as deductions in the relevant financial year. You have used these cabins for your own private purposes for short periods in the relevant financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for expenses 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

In determining whether an expense is deductible for income tax purposes it is necessary to establish a direct connection between holding a property to generate rental income and the expenses associated with holding that property. Where this connection has been established for a rental property, a landlord can deduct the expenses associated with holding that property to generate income. Examples of expenses that may be deductible under section 8-1 of the ITAA 1997 as general deductions include cleaning, council rates, insurance, interest on the mortgage, property management fees, and strata fees.

The ATO Rental Properties Guide 2023 (NAT 1729-6.2023) explains the conditions that must be met to establish a connection between holding a property to generate rental income and the expenses associated with holding that property. You are considered to be holding a rental property to generate income where it can be shown that it is genuinely available to rent.

In your case, you have not advertised for tenants nor generated any income from your cabins in the relevant financial year. The strata agreement you signed on purchase of these cabins prevents you from legally entering into a rental agreement that has not been arranged by on-site managers nominated in that agreement. The on-site managers nominated in that agreement are not currently licensed to advertise rental properties and will not allow anyone else to take on this role.

As your cabins were not advertised, they cannot be considered as genuinely available to rent. As these cabins generated no income and were not genuinely available to rent, they cannot be considered to have been held to generate income. Therefore, expenses you incurred while holding these cabins in the relevant financial year cannot be considered to have arisen from an income generating activity and cannot be claimed as deductions under section 8-1 of the ITAA 1997.