Edited version of private advice

Authorisation number: 1052315350762

Date of advice: 9 October 2024

Ruling

Subject: Deductions - rental expenses

Question 1

Can you claim the expenditure you incurred for loan interest, title insurance, water rates, prepaid rates for land, gardening expenses, landlord insurance, key cutting and car rental/petrol in relation to the Property as deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)??

Answer

Yes.

Question 2

Can you claim the expenditure you incurred for contamination testing by a plumber and related expenses as environmental protection activities under subsection 40-755(1) of the ITAA 1997?

Answer

Yes.

Question 3

Can you claim the legal expenses you incurred in relation to investigating legal action against the agent and vendors of the Property as deductions under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 4

Can you claim depreciation deductions for the trolley you purchased for use at the property under section 40-25 of the ITAA 1997?

Answer

Yes.

Question 5

Can you claim a capital works deduction for the fence privacy decoration you purchased for the Property under Division 43 of the ITAA 1997?

Answer

Yes.

This private ruling applies for the following period:

Year ended 30 June XXXX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a Property with the intention of renting it to tenants.

The Property had caveats on the title, one of which was lodged by a govt body pertaining to issues relating to the property.

Prior to the auction, you enquired if the property had been used for nefarious purpose. In response, you received an email from the real estate agent denying any wrongdoing being committed on the premise.

On the day your tenants were due to move into the Property, a nearby resident informed you that the Property had been used for nefarious activities.

In view of this information, you did not rent out the property.

Further Investigation revealed that illegal activity had in fact existed on the premises.

Subsequently, you had the premises forensically tested. This revealed above acceptable traces of chemical on the premises.

During this period, the Property remained vacant as you could not guarantee the health of any prospective tenant who lived in the Property.

You secured the service of a solicitor and barrister and intended to sue the agent and vendors for misrepresentation. You paid legal fees in relation to your potential legal claim.

You engaged a plumber to identify the extent of damage caused due to the plumbing in a bathroom of the Property, once it became apparent that the contaminated material was being disposed of down the stormwater/ sewerage systems in the room.

The Property is a four-level terrace. You provided a partially furnished house with a washing machine and refrigerator for the tenant to use. In order to transport these items to the third floor you required the assistance of three wheeled stair trolley which you purchased for $XXX.

You also had to transport the refrigerator to the Property from the place of purchase and paid $XX for car rental and petrol.

The trolley remains on the ground floor at the Property to assist tenants with moving larger items, to not damage the Property.

Up until XX June XXXX, you incurred other expenses relating to the Property that included loan interest of $XXXX, title insurance $XXXX, reimbursement of prepaid rates $XXX, landlord insurance $XXX, water rates $XXX, gardening related expenses $XX and key cutting $XX.

You also purchased a fence privacy decoration for $XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 subsection 40-755(1)

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Question 1

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

Expenditure is capital in nature where it is made with a view to bring into existence an asset or advantage that is of enduring benefit. Capital expenditure is characterised by the fact that it is usually a one-off payment and establishes, replaces or enlarges the income producing asset.

Expenses associated with the letting of a rental property that can be claimed under section 8-1 of the ITAA 1997 include the costs associated with holding the property such as council, water, and sewerage rates, land tax, and emergency services levies.

Interest on loans used to purchase a rental property can also be claimed as a deduction under section 8-1 of the ITAA 1997 if that interest has accrued in a year in which the property is rented or genuinely available to rent.

Where these expenses cannot be claimed as immediate deductions under section 8-1 of the ITAA 1997, they may be deductible over a number of years under the capital allowances or capital works provisions. Alternatively, they may be included in the cost base of the property for capital gains purposes.

In your case, you purchased the Property with the intention of renting it out. You incurred expenses such as loan interest, title insurance, water rates, prepaid rates for land, gardening expenses, landlord insurance, key cutting and car rental/petrol.

Therefore, you can claim the above expenses as a deduction under section 8-1 of the ITAA 1997

Question 2

Expenditure incurred in carrying on environmental protection activities can be claimed as an immediate deduction under subsection 40-755(1) of the ITAA 1997. As discussed in Taxation Ruling TR 2020/2 Income tax: deductions for expenditure on environmental protection activities, environmental protection activities are those that are undertaken to prevent, fight, or remedy pollution associated with your earning activity or the site of that earning activity.

In your case, you incurred expenses for contamination testing by a plumber and related expenses in relation to the former use of the Property for nefarious activity.

Consequently, it is considered that these expenses are environmental protection activities, and you can claim them as a deduction under subsection 40-755(1) of the ITAA 1997.

Question 3

Generally, legal expenses have been held to be deductible if the expenses have arisen as a consequence of the taxpayer's income earning activities provided that the legal expenses are not of a capital, private or domestic nature (Herald & Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169 (Herald & Weekly Times), Putnin v. Federal Commissioner of Taxation (1991) 27 FCR 508; 91 ATC 4097; (1991) 21 ATR 1245 (Putin's Case) and Federal Commissioner of Taxation v. Snowden & Willson Pty Ltd (1958) 99 CLR 431; 11 ATD 463; (1958) 7 AITR 308 (Snowden's Case)).

Legal expenses are generally seen as an outgoing on revenue account or an outgoing of capital nature depending on the case or purpose for which the legal expense was incurred (Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946)72 CLR 634;1946 3 AITR 436; 8 ATD 190)

The principles established in Herald and Weekly Times are that the case dealt with the trustees of a deceased estate, who let a city property to several tenants. A tenants injured employee claimed damages against the trustee in respect of injuries she sustained on the rental premise. The Board, in allowing the trustees a deduction for the amount that they paid to settle the claim, stated that:

[the trustees] became liable... because they had let rooms to tenants...It was in the capacity of landlord that the outgoing was incurred...the expense incurred resulted from a risk which, to a landlord, is ever present...the expense claimed as a deduction was one which arose out of the letting of the building to tenants for the purpose of producing assessable income, and that it can properly be regarded as having been incurred 'in the course of' gaining or producing that assessable income...I cannot see that the outgoing produced "an enduring benefit" of any sort. I can see no justification...for capitalising the expense. It seems to me to be one which should properly be set against revenue account.

In your case, you incurred legal expense in your capacity as landlords of the rental property and it is considered that there is a direct correlation between the legal expenses and holding the Property for income producing purposes.

Therefore, you are entitled to a deduction for the legal expenses under section 8-1 of the ITAA 1997.

Question 4

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that can reasonably be expected to decline in value over the time it is used.

Depreciating assets are those items that can be described as plant, which do not form part of the premises.

In your case, you acquired a trolley for use at the Property and it is kept at the Property.

Therefore, you can deduct an amount equal to the decline in value of the trolley.

For more information, see the Rental properties 2024 guide available by typing QC 101711 in the search box on www.ato.gov.au.

Question 5

Division 43 of the ITAA 1997 provides a deduction for capital works. The rate of deduction for capital works for a residential property is 2.5% of construction expenditure over 40 years.

Deductions based on construction expenditure apply to capital works such as:

•         a building or an extension, for example, adding a room, garage, patio or pergola

•         alterations, such as removing or adding an internal wall

•         structural improvements to the property - for example, adding a gazebo, carport, sealed driveway, retaining wall or fence

In your case, it is considered that the privacy structure you acquired for the Property is not an item of plant as it would be attached to a fence (or similar) at the Property. It is a capital expense.

Therefore, the cost of the fence privacy decoration can be claimed as a capital works deduction over a number of years.

For more information, see the Rental properties 2024 guide.