Edited version of private advice

Authorisation Number: 1052299303834

Date of advice: 9 September 2024

Ruling

Subject: Rental property deductions - property becomes main residence

Question 1

Can you claim a deduction for the expenses listed under the heading "Expenses 1" which you incurred repairing your property?

Answer

No.

Question 2

Can you claim a deduction for the expenses listed under the heading "Expenses 2" which you incurred repairing your property?

Answer

Yes.

Question 3

Can you claim a deduction for the expenses listed under the heading "Expenses 3" which you incurred repairing your property?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You had sole ownership of the property.

The property was your main residence from 20XX and you planned to live in the property in your advanced years.

You commenced renting the property to tenants on XX/XX/20XX.

The lease was strictly on a 12-month fixed term.

You requested the real estate to give notice to the tenants to vacate the property in 20XX.

The tenants vacated the property three years after being requested to vacate. Your real estate agent handed the property back to you two months after the tenants vacated.

You declared the property your principal place of residence in the same month it was handed back to you, as you needed to regularly instruct trades people with the repairs, and you were doing cleaning work on the property yourself.

You engaged a cleaning company three times to clean inside the property due to the poor condition the property was left by the tenants.

You incurred the following expenses:

Expenses 1

XX/XX20XX: replaced stained carpet.

XX/XX20XX: replaced curtains.

Expenses 2

XX/XX20XX: pressure wash concrete.

XX/XX20XX: first clean.

XX/XX20XX: clean outside of property.

XX/XX20XX: building inspection.

XX/XX20XX: repair of walls, ceilings and paint whole house.

XX/XX20XX: second clean, fix lights, repair pantry door and other miscellaneous work.

XX/XX20XX: cleaning and outside maintenance work.

XX/XX20XX: garden maintenance.

Expenses 3

XX/XX20XX: third clean.

XX/XX20XX: repair damaged door.

XX/XX20XX: hedge trimming and repair fence.

XX/XX20XX: remove tenants' furniture.

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 section 40-45

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Repairs

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes. Subsection 25-10(3) of the ITAA 1997 precludes a deduction for repairs where the expenditure is of a capital nature.

The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710 (Thomas' Case), it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant.

Taxation Ruling Income tax: deductions for repairs of the ITAA 1997 (TR 97/23) explains the circumstances in which expenses incurred by a taxpayer for repairs are allowable as a deduction under section 25-10 of the ITAA 1997. What is a 'repair' for the purposes of section 25-10 of the ITAA 1997 is a question of fact or degree in each particular case.

TR 97/23, at paragraph 15, explains that a repair for the most part is occasional and partial. A repair merely replaces a part of something that is already there and has become worn out or dilapidated. Work carried out can fairly be described as a 'repair' if 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.

Decline in value

Section 40-25 of the ITAA 1997 states that you can deduct an amount for the decline in value of a depreciating asset you hold to the extent that you use it for a taxable purpose. The term 'depreciating asset' is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

However, subsection 40-45(2) of the ITAA 1997 provides that Division 40 of the ITAA 1997 does not apply to capital works to the extent that an amount is or could have been deductible under Division 43 of the ITAA 1997 (capital works).

Under subsection 40-80(2) of the ITAA 1997, an immediate deduction for certain non-business depreciating assets costing $300 or less can be claimed providing the asset cost less than $300; it is used mainly for the purpose of producing assessable income; it is not part of a set of assets that cost more than $300; and it is not one of a number of identical or substantially identical assets which together cost more than $300.

Deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses or 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.

To the extent incurred in gaining or producing your assessable income

Taxation Ruling Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997 (TR 2020/1)explains in the following paragraphs when expenses require apportionment in relation to producing assessable income.

Paragraph 37, The use of the phrase 'to the extent' in section 8-1 means that expenses may be deductible only in part if incurred in gaining or producing assessable income as well as for some other use, object or purpose.

Paragraph 38, in these circumstances, it is appropriate to apportion expenses between their income-producing, and other, elements. In cases where there is no obvious method of apportionment, it is to be done on a 'fair and reasonable' basis. What is fair and reasonable depends on the particular facts and circumstances relating to the expense.

Paragraph 39, A common approach for employee expenses is time-based apportionment between work-related and private use of an expense item.

The negative tests

Paragraph 41, even if an expense meets the positive test, a deduction cannot be claimed if it fails one of the negative tests. The negative tests are whether an expense is:

•         capital or capital in nature

•         a private or domestic expense

•         incurred in gaining or producing exempt income.

Income producing

Taxation Ruling IT 180 repairs to property carried out after cessation of income production discusses in paragraph 4, a deduction may be allowed for the cost of repairs to property providing:

(a) the necessity for the repairs can be related to a period of time during which the premises have been used to produce assessable income of the taxpayer, and

(b) the premises have been used in the production of such assessable income of the year of income in which the expenditure incurred.

Application to your circumstances

You owned a property which you started renting to tenants on XX/XX/20XX. The lease agreement was for a 12-month duration. After numerous attempts to evict the tenants, they vacated the property on XX/XX/20XX. The property was handed back to you in XX/20XX.

Your real estate agent had not entered the property to complete an interior inspection within the two years from first being leased. The tenants left the property with extensive rubbish inside and out and did not complete any cleaning of the property when they vacated. Due to the state of the property, you needed to complete numerous inside and outside cleaning and repairs. You paid for a building inspection report to ascertain the extent of the damage. You moved back into the property on XX/XX/20XX as your main residence to oversee the repairs. You decided to sell the property, which occurred on XX/XX/20XX.

Question 1

The items listed under the heading "Expenses 1" are capital assets, therefore these expenses are not deductible as repair expenses under section 25-10 of the ITAA 1997. Furthermore, a deduction is not allowable for these expenses under section 40-25 of the ITAA 1997 as they were not used for any taxable purpose after installation.

Question 2

The expenses listed under the heading "Expenses 2" relate to repairs undertaken to restore the property to the state it was in prior to being damaged by tenants. These expenses relate to a time when you were leasing out the property and you incurred them in the same income year that you were earning assessable income. Therefore, in accordance with the Income Tax ruling IT180, the expenses that you incurred for the items at "Expenses 2", are an allowable deduction under section 25-10 of the ITAA 1997.

Question 3

The expenses listed under the heading "Expenses 3" are not deductible as you were using the property from XX/ XX/20XX for a private purpose as your main residence. Therefore, you did not incur the expenses during a time that you were earning assessable income as per section 8-1 of the ITTA 1997 or section 25-10 of the ITAA 1997.

You did not lease the property out in the income year in which these expenses were incurred, and you were using the property as your main residence, and you sold it in XX/20XX. Therefore, the items listed at "Expenses 3" are not deductible under section 25-10 of the ITAA 1997 as they were private in nature.