Edited version of private advice

Authorisation Number: 1052268577060

Date of advice: 2 July 2024

Ruling

Subject: Deductions - rental repairs and holding costs

Question 1

Are repairs undertaken to remedy salt damp damage incurred in the 2023 income year deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the holding costs of the rental property deductible under section 8-1 of the ITAA 1997 whilst salt damp damage remediation works were undertaken during the 2023 income year?

Answer

Yes (to the extent these are not capital outgoings).

This ruling applies for the following period:

Income tax year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.     The taxpayer has owned the property (the Property) since 19XX.

2.     The Property has been used for income producing purposes.

3.     The Property had the same tenants between June 20XX and August 20XX.

4.     Build-up of leaf littering accumulating on the Southern external wall of the Property resulted in salt damp damage over an area to the height of 1m and 15m in length.

5.     There was no presence of salt damp prior to these tenants moving in.

6.     The nature of the works required included salt damp remediation and electrical works.

7.     The Property was uninhabitable during the works undertaken. The works were completed over a period of XX months in total.

8.     Due to the Property being vacant while works were undertaken and the Property being re-tenanted once works were completed, you also incurred holding costs relating to this period in the income year ending 30 June 20XX.

Relevant legislative provisions

Section 25-10 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Question 1

Summary

The works undertaken by the taxpayer for salt damp remediation and electrical works are considered repairs and are deductible under section 25-10 of the ITAA 1997 for the income year ending 30 June 20XX.

Reasons for decision

Section 25-10 Repairs

Subsection 25-10(1) of the ITAA 1997 states that you can deduct expenditure you incur for repairs to premises (or part of premises) or a depreciating asset that you held or used solely for the purpose of producing assessable income.

Taxation Ruling 97/23 Income Tax: deductions for repairs (TR 97/23) explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction.

The relevant paragraphs from TR 97/23 have been extracted as follows:

13. The word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplated the continued existence of the property.

14. Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a 'repair' unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property.

15. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

16. To repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10.

Application to your circumstances

In this case, the building was acquired in 19XX and has been used for income producing purposes. The works have been carried out to remedy the damage caused by salt damp in the brick work and to prevent further contamination due to rising damp. These works have been undertaken to make good damage that has occurred by natural causes during the passage of time as per paragraph 15 of TR 97/23. The works undertaken by the taxpayer are considered repairs and are deductible under section 25-10 of the ITAA 1997.

Question 2

Summary

The holding costs (to the extent they are not capital outgoings) incurred by the taxpayer whilst their rental property was undergoing repairs are deductible under section 8-1 of the ITAA 1997 for the income year ending 30 June 20XX.

Reasons for decision

Subsection 8-1(1) of the ITAA 1997 states that you can deduct from assessable income any loss or outgoing to the extent that:

a)    it is incurred in gaining or producing assessable income; or

b)    it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

However, a deduction is not permitted to the extent the loss or outgoing is:

• capital or of a capital nature
• private or domestic in nature
• incurred in producing exempt or non-assessable non-exempt income, or
• a provision prevents you from deducting it.

The positive limbs of section 8-1 of the ITAA 1997 are not mutually exclusive and a business expense is frequently deductible under either. To be deductible under the first limb, a loss or outgoing must be incidental and relevant to gaining or producing assessable income (Ronpibon Tin NL v FC of T (1940) 78 CLR 47; 8 ATD 431; [1949] HCA 15). To be deductible under the second limb, a loss or outgoing must be part of the cost of trading operations to produce income (John Fairfax & Sons Pty Ltd v FC of T (1959) 101 CLR 30; 11 ATD 510; [1959] HCA 4).

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.

Application to your circumstances

In this case, the taxpayer held the property for income-producing purposes. The property was uninhabitable whilst the repairs were being undertaken and as soon as the property was ready it was re-tenanted. This demonstrates that the property was genuinely held for an income producing purpose both before and after the making of the repairs. Therefore, the holding costs incurred during the 2023 income year satisfy the testing in section 8-1 of the ITAA 1997 as they have a nexus to gaining or producing assessable income being the rent following the making of the repairs. For this reason, the holding costs (to the extent they are not capital outgoings) are deductible under section 8-1 of the ITAA 1997.