Edited version of private advice

Authorisation Number: 1052206002346

Date of advice: 18 January 2024

Ruling

Subject: Rental property - repairs

Question 1

Can you claim the cost of repairs to your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can you claim a deduction for the removal and disposal of damaged asbestos-based exterior cladding under section 40-755 of the ITAA 1997?

Answer

No.

Question 3

Can you claim expenditure on holding costs and interest on loans as deductions under section 8-1 of the ITAA 1997 while your property is vacant due to repairs?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You purchased a property some years ago and made the property available for rent from shortly after.

The property is managed for you by a real estate agent.

You have never lived in this property.

The property has until recently always been occupied and rent charged according to market rates as advised by the managing real estate.

In the relevant financial year this property was damaged through exposure to flood water and damage caused by tenants.

The occupying tenant moved out through the relevant year and the lease was terminated shortly after as mould had spread throughout the house following the exposure to flood water and had become a significant health concern.

You commenced remediating the damage at that point.

Your action in terminating the lease for repairs was proactive, and the property was not deemed unsafe to occupy by the council, any other relevant body, or qualified professional. You took advice on meeting your responsibilities as landlords from a government website on health and safety when renting a property.

You have submitted a report from a qualified builder stating that your property had been affected by heavy rain events which caused flooding underneath the house.

On their inspection they found significant amounts of mould throughout the property, including wall cavities, because of flood waters ponding under the house.

The builder's recommendations included removal of all internal and external walls, insulation, and removal of flooring to install subsoil drainage and to raise the level of the underside of the house. You have paid the builder to undertake this work. You also paid for the safe removal and disposal of the asbestos based external cladding.

The original timber floorboards also showed signs of mould and decay. Your replaced these with floorboards made of a rigid plastic composite core material.

This restoration work was not completed before the end of the relevant financial year and the property was not made available to rent while the work was being completed. for the remainder of the 2022-23 financial year. This work is now nearing completion and you are hoping to have the property advertised as available to rent in the next month.

You purchased the property with a loan, have refinanced the loan, and intend using additional funds made available through this refinanced loan to help cover the cost of the repairs to the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 40-755

Reasons for decision

Question 1

Can you claim the cost of repairs to your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The cost of the repairs is deductible under section 25-10 of the ITAA 1997 as the damage you have repaired occurred during a period you were using the property to generate income.

Detailed reasoning

The cost of repairs to a rental property may be deductible under section 25-10 of the ITAA 1997 depending on the purpose of the repairs, nature of the repairs and your use of the property when the damage occurred. As discussed in Taxation Ruling TR 97/23 Income tax: deductions for repairs the cost of repairs can be claimed as a deduction when the purpose of the repair is to restore the efficient functioning of the property for its income generating purpose.

Repairs to a property can be made through the replacement of property fixtures, or resolving issues such as damage to or deterioration of existing fixtures. Work done to prevent damage or deterioration can also be considered to be a repair if it is undertaken with work to remedy existing damage to the property Improvements, renovations, extensions, or alterations that aim to enhance a properties income generating potential are considered capital costs and are not deductible as repairs. Repairs that bring about minor degrees of improvement or alteration may still be considered deductible.

The repaired property must have been used, or available to use, to generate income when the damage or deterioration occurred, A rental property is considered available to use if it has been genuinely advertised as available to rent.

Your property was affected by flood water, damage from tenants, and the mould that had spread throughout the house, including wall cavities and insulation, following exposure to the flood water in the relevant financial year. On termination of the tenants lease you began undertaking repairs as recommended by a builder. These repairs included removal and replacement of all internal and external walls, insulation, and removal of flooring to install subsoil drainage and to raise the level of the underside of the house:

The external wall cladding and internal wall linings were replaced with similar materials. The installation of subsoil drainage and raising of the level of the underside of the house was taken in conjunction with these repairs to prevent similar damage occurring in the future to your property.

The original timber floorboards in your property had been affected by wear and exposed to high levels of mould, and were further damaged when they were taken up to install drains under the house Your replaced these with floorboards made of a rigid plastic composite core material. The material these floorboards are made of will constitute only a minor improvement, if any, over the previous timber floorboards.

Your rental property had been continually managed by a real estate agent, and occupied or available to rent from 18 April 2017 until the termination of the lease that allowed you to undertake these repairs.

You undertook repairs and concurrent preventative work to restore the property to efficient functioning so you can continue generating income through your rental activity and prevent further damage to the property. You have replaced damaged flooring with a functionally similar material that offers only a minor, if any, degree of improvement over the original floorboards. The damage you have repaired occurred within a period you were using the property to generate income. This being the case the cost of repairs you have undertaken can be claimed as a deduction under section 25-10 of the ITAA 1997.

Question 2

Can you claim a deduction for the removal and disposal of damaged asbestos based exterior cladding under section 40-755 of the ITAA 1997?

Summary

The damaged asbestos cladding on your house was removed as part of otherwise deductible repairs so it cannot be claimed under section 25-10 of the ITAA 1997, but can be claimed under section 8-1 of the ITAA 1997.

Detailed reasoning

Expenditure incurred in carrying on environmental protection activities can be claimed as an immediate deduction under subsection 40-755(1) of the ITAA 1997. As discussed in Taxation Ruling TR 2020/2 Income tax: deductions for expenditure on environmental protection activities environmental activities are those that are undertaken to prevent, fight, or remedy pollution associated with your earning activity or the site of that earning activity.

An immediate deduction can be claimed for the cost of environmental protection activities where the sole or dominant purpose of the expenditure was to protect the environment. Payment of a single sum for an environmental protection activity will still satisfy this criterion if it also achieves other ends. If that sum is expended for multiple activities the amount that may be claimed will depend on whether the costs can be attributed to separate activities. An invoice that shows the costs of those activities specifically directed to environmental protection will be sufficient basis for you to claim a deduction for those costs. If the cost of the environmental protection activities cannot be separated from other work paid for in a single transaction then the cost can only be claimed if environmental protection was the sole and dominant purpose of the expenditure.

You cannot claim these costs for structural improvement, alteration, or improvement to a building unless the improvement is otherwise minor or incidental. You also cannot claim a deduction under these provisions if the amount can be claimed under another provision of the ITAA 1997. As noted in paragraphs 26 and 27 of TR 97/23 expenditure to control health risks from dangerous substances, such as asbestos, cannot be claimed under section 25-10 of the ITAA 1997 unless it is in the course of making otherwise deductible repairs.

You have had asbestos cladding and eaves that had been exposed to flood waters removed and disposed of. As this work was undertaken to remedy water damage and the following mould infestation it can be considered to be in the nature of repairs to the materials of the house, and would otherwise be deductible under section 25-10 of the ITAA 1997.

You undertook the repairs to restore the property to efficient functioning so you can continue generating income through your rental activity. You have removed the damaged asbestos cladding and eaves and replaced them with a functionally similar material. The damage you have repaired occurred within a period you were using the property to generate income. This being the case the cost of the removing the external cladding and eaves can be claimed as a deduction under section 25-10 of the ITAA 1997.

Question 3

Can you claim expenditure on holding costs and interest on loans as deductions under section 8-1 of the ITAA 1997 while your property is vacant due to repairs?

Summary

Your property was not available to rent for an extended period while you undertook repairs so the holding costs and interest on loans cannot be claimed as deductions under section 8-1 of the ITAA 1997 for that period.

Detailed reasoning

A broad range of expenses associated with the letting of a rental property can be claimed under section 8-1 of the ITAA 1997 for periods in which the property is rented or genuinely available to rent. As discussed in the Australian Taxation Office publication Rental Properties 2023 (NAT 1729-06.23) these expenses may also be claimed as deductions if they relate to short periods in which the property is still available to rent but undergoing repairs. A rental property is considered available to use if it has been genuinely advertised as available to rent.

Expenses associated with the letting of a rental property that can be claimed under section 8-1 of the ITAA 1997 include the costs associated with holding the property such as council, water, and sewerage rates, land tax, and emergency services levies. Interest on loans used to purchase a rental property can also be claimed as a deduction under section 8-1 of the ITAA 1997 if that interest has accrued in a year in which the property is rented or genuinely available to rent. Where these expenses cannot be claimed as immediate deductions under section 8-1 of the ITAA 1997 they can be included in the cost base of the property for capital gains purposes.

Your rental property was affected by flood waters and mould and was last occupied by tenants in the relevant financial year. You did not advertise it as available from that date as you had concerns about the health and safety risk posed by the mould to potential tenants. Shortly after the tenants moved out the lease was terminated and you began remedial work on the property. Due to the extent of the work required and the difficulty of sourcing tradespeople to undertake the remedial work the repairs were ongoing and were not expected to be completed until some time into the next financial year. You did not advertise the property as available to rent while the repairs were being undertaken but intended to advertise the property as available to rent once the repairs were completed.

As your property was not available to rent through the period of the repairs, and the period was extended, you cannot claim costs, apart from interest, that relate to your holding of the property through the period of the repairs. These costs can be added to the cost base of your property for capital gains purposes. You can only claim a deduction for interest on the loan you used to purchase the property if that interest accrued in a year in which the property was rented or available to rent.