Edited version of private advice

Authorisation Number: 1052268344676

Date of advice: 7 August 2024

Ruling

Subject: Deductions - rental property

Question 1

Does your rental income received from an investment property in Country B form part of your assessable income in Australia under section 6-5 of the Income Tax Assessment Act (ITAA 1997)?

Answer

Yes.

Section 6-5 of the ITAA 1997 provides that assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia.

In determining liability to Australian, tax on foreign sourced income it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Schedule 4 of the Agreements Act contains the double tax agreement between Australia and the foreign country (the Agreement). The Agreement operates to avoid the double taxation of income received by Australian and the foreign country's residents.

Where rental income from Country B is received by a resident of Australia, this income will form part of their assessable income and if tax has been paid in Country B in relation to this rental income, then a foreign tax credit will be allowed when the Australian income tax return is lodged.

If claiming a foreign income tax offset of more than $1,000 you will first need to work out your foreign income tax offset limit. For further information on how to calculate your foreign income tax offset limit visit ato.gov.au by searching QC 90701 - Calculating and claiming your foreign income tax offset.

Question 2

Can you immediately deduct expenses you incurred to undertake repairs to damaged and deteriorated parts of your rental property located in Country B (the rental property) under section 25 - 10 of the 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 5, Item 6.1 and Item 7 are repair expenses which may be deducted immediately under section 25-10 of the ITAA 1997.

Any expenses in Item 2,Item 6.2 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 3

Can you deduct expenditure for capital 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 1, Item 3.1, Item 3.2, Item 4, Item 8, Item 9, Item 10 and Item 11 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 periods:

Year ended DD MM 20XX

Year ended DD MM 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You own an investment rental property (the property) located in Country B.

On DD MM 20XX, you purchased the property in your sole name for $XX.

The property was rented out the same period of when it was acquired due to tenants already residing in the property.

The property was available for a full income year.

The property is leased for market value rent set by real estate managers.

The property has not been vacant at any time for the last four years. The last time the property was vacant was during a change of tenant.

You have not used or lived in the property at any time during your ownership. The property has never been tenanted rent free.

The property is a kit set house from around 19YY-19YY. Several years ago, a leak formed in the shower wall. An attempt was made to repair it, but the problem was ongoing and led to bad water damage to the shower wall on two sides. Mould was found on the walls in the adjoining bedroom as well.

The shower was over a full height but short, formed synthetic bathtub, that was shaped to fit the room's alcove. When this developed a crack as well, you tried to replace it with one of a similar size, but nothing was available and the house was so old that the builder no longer manufactured that style of bath.

You installed a preformed shower unit.

Sections of the wall and damaged windows needed to be replaced in the bathroom and new lining in the bedroom. Parts of the sill had rotted internally, due to both condensation build up and the water damage from the leak on the wall.

You painted the bathroom and plastered walls due to the installation of the new shower.

The vanity in the bathroom required moving for the installation of the new shower. As a result, this caused some wastage. The waste pipe and taps were required to be replumed into their new position.

You reglazed the bathroom window which was cracked.

You replaced a broken toilet roll holder that had broken off and a door stop in the bathroom which required replacement as sundries.

You replaced a bathroom blind as it had was old and had tears in it.

Existing toilet was retained.

Total expenses for this work for year 20XX-20XX came to Country B $XX.

The items you wish to claim are as follows:

•        Item 1: Shower installation

o   Total sum $XX

•        Item 2: Bedroom damaged window

o   Total sum $XX

•        Item 3.1: Bathroom plastering

•        Item 3.2: Bathroom window frame

o   Total sum $XX

•        Item 4: Plumbing

o   Total sum $XX

•        Item 5: Bathroom window reglaze

o   Total sum $XX

•        Item 6.1: Painting bathroom

•        Item 6.2: Bedroom and lounge sills

o   Total sum $XX

•        Item 7: Vanity

o   Total sum $XX

•        Item 8: Tap and vanity waste

o   Total sum $XX

•        Item 9: Bathroom flooring/lino

o   Total sum $XX

•        Item 10: Sundries

o   Total sum $XX

•        Item 11: Bathroom blind

o   Total sum $XX

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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

Income Tax Assessment Act 1997 section 995-1

International Tax Agreements Act 1953 schedule 4