Edited version of private advice

Authorisation Number: 1052211255084

Date of advice: 16 January 2024

Ruling

Subject: Repairs to rental property

Question

Is the cost for testing services, engaging a specialist to decontaminate, dispose and replace infected items in the rental property considered a repair and maintenance cost and deductible?

Answer

Yes. Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that expenditure incurred for repairs to premises held or used solely for the purpose of producing assessable income are deductible in the year in which the expenditure was incurred.

The meaning of 'repairs' and the circumstances under which repairs are deductible, as set out in Taxation Ruling TR 97/23 Income tax: deductions for repairs, is applicable.

'Repairs' for the purposes of section 25-10 of the ITAA 1997 relates to the making good of defects, damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes, to restore the efficiency of function of the premises (or part of premises), without changing its character.

Section 40-755 of the ITAA 1997 allows an immediate deduction for expenditure you incur for the sole or dominant purpose of carrying on environmental protection activities.

Taxation Ruling TR 2020/2: deductions for expenditure on environmental protection activities mentions the testing activity is considered to be integral to the undertaking of an environmental protection activity.

In your case, to the extent the remedying, removal and disposal of contaminated items is not a repair for the purposes of section 25-10 of the ITAA 1997, it will qualify as an environmental protection activity for the purposes of section 40-755 of the ITAA 1997, and you will be entitled to a deduction under section 40-755 of the ITAA 1997. Deductions for these expenses should be in proportion to your ownership interest in the property.

This ruling applies for the following period:

Period ended 30 July XXX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your family reside in the property at XXX. There is guest house/granny flat located in the back of the property. You use the guest house as an investment property and rent it through Air BNB.

During the XXX financial year, the tenants used the guest house as a methamphetamine laboratory and as a result damaged the property leaving it unfit to rent to other tenants until it had been restored and deemed safe to rent.

You had to engage a specialist to decontaminate the property so that it can be restored to the original state and safe to be rented out again. You had the contaminated contents in the house removed and completely renovated the house with new paint, flooring, electrical appliances and window screens to make the house safe.

Your provided related invoices totalling XXX, which included testing, the decontamination process, the removal and replacement of contaminated items, including electrical items.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-755