Edited version of private advice

Authorisation Number: 1052239890934

Date of advice: 21 May 2024

Ruling

Subject: Deductions - rental property

Question 1

Can you immediately deduct expenses you incurred to undertake repairs to damaged and deteriorated parts of your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Section 25-10 of the ITAA 1997 permits an immediate deduction for expenditure you incur to repair premises or plant which you hold or use for the sole purpose of producing assessable income; unless the outlay is capital expenditure which is prevented from being deductible as a repair by subsection 25-10(3) of the ITAA 1997.

Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) explains that the word 'repairs' should be taken to retain its ordinary meaning, which is to make good and restore the efficiency of function of that which is damaged or broken. Paragraphs 12 to 22 of TR 97/23 elaborates the ATO view on what constitutes a repair as it relates to section 25-10 of the ITAA 1997. Also, paragraph 34 of TR 97/23 explains that the replacement of damaged permanent fixtures such as locks and exhaust fans may be deductible under section 25-10 of the ITA 1997.

In your case, Item 1.1; Item 2; Item 3.2; Item 4; Item 6; Item 8.1 and Item 9.1 are repair expenses which may be deducted immediately under section 25-10 of the ITAA 1997.

Any expenses in Item 7 and Item 8.2 you incurred to replace broken or non-functional permanent fixtures (such as broken light switches) with functionally equivalent replacements also deductible under section 25-10 of the ITAA 1997.

Question 2

Can you deduct depreciation losses for capital expenditure you have outlaid to repair your rental property under Division 40 and section 40-25 of the ITAA 1997?

Answer

Yes.

Taxation Ruling TR 2022/1 Income tax: effective life of depreciating assets (TR/2021) explains a deduction may be available under Division 40 for a depreciating asset's decline in value, to the extent that the asset was held by you at any time during the year and used for a taxable purpose.

The amount you can deduct will be reduced to reflect the extent to which the asset is used for a purpose other than a taxable purpose, e.g. private or domestic purposes or to produce exempt income (section 40-25 of the ITAA 1997).

In your case Item 1.2, Item 3.1, and Item 9.2 are capital expenses, upon which depreciation losses can be deducted under Division 40 and section 40-25 of the ITAA 1997. Any fixtures in Item 7, Item 8.2 which are not like-for-like replacements of damaged or broken permanent fixtures will also be depreciable as capital expenditure.

For details on how to calculate the allowable depreciation deduction, please refer to the Australian Tax Office's Guide to depreciating assets which is available on the website www.ato.gov.au.

Question 3

Can you deduct capital works for works completed to the rental property under Division 43 of the ITAA 1997?

Answer

Yes.

Division 43 provides a deduction for construction expenditure on capital works (including buildings) used for residential accommodation if the construction of the capital works commenced after 17 July 1985 and the capital works are used to produce assessable income. The rate of deduction is 2.5% of the capital expenditure able to be deducted over 40 years. However, construction expenditure excludes expenditure on plant. Therefore, a deduction for expenditure on plant is not available under Division 43.

Division 43 applies to capital works that are buildings or structural improvements and to extensions, alterations or improvements to those buildings or structural improvements. If an item in a residential rental property is capital works then generally a deduction will not be available under Division 40 unless the item is both plant and a depreciating asset and the other conditions of Division 40 are met.

In your case item 5 is considered to be a capital works expense and you are entitled to a capital works deduction under Division 43 for 2.5% of the cost of the installation in your rental property over 40 years, while the property is rented or available for rent.

Note: the amount you can claim each year will need to be apportioned in accordance with your legal interest in the property.

This ruling applies for the following period:

Year ending DD June 20XX

The scheme commenced on:

DD July 20XX

Relevant facts and circumstances

You own a rental property ('the property').

In MM 19XX, you purchased the property for $XX.

You are the landlord of the property.

On DD MM 20XX, the property was first made available for rent.

From DD MM 20XX to DD MM 20XX your property was rented to a single residential tenant.

On DD MM 20XX, the tenant vacated the property immediately prior to an end of lease inspection being conducted.

Upon inspection of the property, you discovered that numerous repair and maintenance works were required to return the property to its original state in order to be suitable for a new tenant.

Between MM 20XX to MM 20XX, the property remained vacant to allow for repairs and maintenance to be conducted to bring the property back to a suitable condition and make it available for rent.

You have had limited access to the property over the period it was rented to your long term tenant, and have only performed minimal repairs when requested by the tenant who was residing in the property at that time.

Some items were beyond repair and required replacement.

The total sum of expenses equated to just over $XXk.

The items you wish to claim are as follows:

•         Item 1.1: Carpet flooring and painting

•         Item 1.2: Carpet flooring and painting

o   Total sum for items 1.1 and 1.2 $XX

•         Item 2: Roof

o   Total sum $XX

•         Item 3: Air conditioner

o   Total sum $XX

•         Item 4: Bathroom

o   Total sum $XX

•         Item 5: External door and roof window

o   Total sum $XX

•         Item 6: Internal wardrobe

o   Total sum $XX

•         Item 7: Electrical

o   Total sum $XX

•         Item 8.1: Plumbing

•         Item 8.2: Plumbing

o   Total sum for items 8.1 and 8.2 $XX

•         Item 9.1: Sundries

o   Itemised work completed by you

•         Item 9.2: Sundries

o   Itemised work completed by you

o   Total sum for items 9.1 and 9.2 $XX

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 40-25

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43