Edited version of private advice

Authorisation Number: 1052288767937

Date of advice: 13 August 2024

Ruling

Subject: Deductions - rental property

Question

Can you claim deductions for expenses you incurred including interest, rates, repairs & maintenance, and other expenses for capital work and capital allowance for the period your rental property was vacant and being repaired during the 20XX and 20XX financial years?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

You and your former partner jointly purchased the property.

From 20XX to XX XXXX 20XX, you used the property as a rental.

The property was rented fully furnished.

By XX XXXX 20XX, the property needed repair due to the period it had been rented. The individual repairs were not substantial in nature. At this time the property was in a habitable state.

On XX XXXX 20XX, the last tenant vacated the property.

You decided to do renovations concurrently while repairing the property.

The renovations involved removing the kitchen, roof, and bathrooms at different times, which made the property unliveable.

From XX XXXX 20XX to XX XXXX 20XX, the property was not rented out or advertised for rent.

From XXXX 20XX to XX 20XX, external landscaping and decking work was completed.

In XXXX 20XX, you separated from your partner. At this time, you had received a quote for internal works but put the work on hold until your family matter was resolved.

On XX XXXX 20XX, the courts granted you 100% ownership in the property following the separation with your former partner.

You were impacted by COVID-19 lockdowns for the following periods:

•         From XX XXXX 20XX to XX XXXX 20XX.

•         From XX XXXX 20XX to XX XXXX 20XX.

•         From XX XXXX 20XX to XX XXXX 20XX.

From XX XXXX 20XX to XX XXXX 20XX, internal work on the property was completed.

On XX XXXX 20XX, you installed all the furniture in the property to rent as fully furnished.

On XX XXXX 20XX, you advertised the property for rent on various short-stay accommodation websites.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The High Court majority in Commissioner of Taxation v Payne [2001] HCA 3 said it is well established that these words are to be understood as meaning incurred 'in the course of' gaining or producing assessable income, and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income.

The majority further stated that the meaning of 'in the course of' gaining or producing income was amplified in Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15 where it was held that:

... to come within the initial part of [section 8-1] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income, or if none be produced, would be expected to produce assessable income...

Genuinely available for rent

One guideline when considering the purpose of the expenditure claimed as a deduction is to determine whether the property was genuinely available for rent. In Inglis v Federal Commissioner of Taxation (1987) 87 ATC 2037 at (71)-(72), Deputy President Todd said:

...While it is true that the property was vacant and theoretically available at all times, it cannot be said to have been truly available for letting unless some perceptible effort was being made to obtain tenants in respect of those times, or at least some step taken to draw its availability to the attention of the public, the classic method of so doing being the placing of it with an agent. The sufficiency of the steps taken is a question of fact to be decided in each case, but in this case, considering the irregular advertising and the restriction of the opportunity of renting to Canberrans, there has in my view been insufficient done for it to be able to be said that the property was available for letting for periods adequate to support the claims made...

Expenses may be deductible for periods when the property is not rented out, providing the property is genuinely available for rent - that is:

•         the property is advertised in ways which give it broad exposure to potential tenants, and

•         having regard to all the circumstances, tenants are reasonably likely to rent it.

The absence of these factors generally indicates the owner does not have a genuine intention to make income from the property and may have other purposes - such as using it or reserving it for private use.

Application to your circumstances

We have concluded that the property was not genuinely available for rent during the period from XX XXXX 20XX to XX XXXX 20XX based on the following considerations:

•         During the period it was not advertised for rent.

•         Prior to XX XXXX 20XX, the property was in a habitable state. You chose to make the renovations to the property which removed the kitchen, roof, and bathrooms, which made the property unliveable.

•         The repairs caused by tenants were individually minor and not substantial in nature.

•         After XX XXXX 20XX, tenants would not have quiet enjoyment of the land whilst the repairs and renovations were taking place.

•         You were impacted by COVID-19.