Edited version of private advice

Authorisation Number: 1052334968479

Date of advice: 21 November 2024

Ruling

Subject: Rental deductions

Question 1

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

Answer

No.

Question 2

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

Answer

Yes.

Question 3

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

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You own a property that commenced generating rental income on XX/XX/20XX.

During the rental period from XX/20XX to XX/20XX, the property was identified as being used as a XXXXX lab by the tenants.

On XX/XX/20XX, a hygienist's preliminary assessment was conducted confirming that XXXXX contamination within the property exceeded acceptable limits in most areas of the property.

As XXXXX contamination was present throughout the property, all remaining soft furnishings were contaminated by XXXXX residue and were rendered unusable.

In XX/20XX, you decided that you would remain in Australia and made the decision to move into the property.

The tenants vacated the property in XX/20XX.

You lived in temporary accommodation until the property was inhabitable.

In XX/20XX, you moved into the property and established it as your main residence.

Due to the XXXXX contamination, the property required remediation. This was completed by XX/XX/20XX.

You incurred the following expenses:

Expenses 1

Blinds

Reverse cycle split system air conditioner

Carpets

Fans

Electrical work including:

•         disconnection of switchgear, lights and oven

•         supply and replace all the switchgear, connect the oven, install light fittings and fans

Expenses 2

Clean and reconnection of earth and new LED Fluro light rest repairs

Replacement of 4x DGPOs and switches

Switchboard repairs

Replacement and supply of a 3 gang heat lamp (light, fan, heater)

Plaster repair and painting

Purchase of paint

Gate repair

Replacement of toilet seats

Replacement of downlights

Replacement of heater

Replacement of exhaust fan

Replacement of insect screen

Replacement of garage door lock

Replacement of insect door screen

Replacement of smart doorbell

Replacement of floodlight camera

Replacement of door stop

Replacement of smoke alarm

Replacement of door seal

Replacement of induction cooktop

Replacement of screws

Replacement of light globe

Expenses 3

Preliminary XXXXX assessment and sample analysis: XXXXX

Post remediation Validation assessment and sample analysis: XXXXX

Remediation (cleaning of property)

Relevant legislative provisions

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 section 40-755

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 the property used for income producing purposes, to the extent that the expenditure is not capital in nature. If the work amounts to a substantial improvement, addition, or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.

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.

Paragraph 23 of TR 97/23 explains that 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 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, however the amount you can deduct must be reduced by any use for a non-taxable purpose in accordance with subsection 40-25(2) of the ITAA 1997. 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).

Application to your circumstances

You own a property which you commenced renting to tenants in XX/20XX.

You decided that you would move into the property in XX/20XX, and the tenants vacated the property in XX/20XX.

You discovered that the property was uninhabitable due to the property being used as a XXXXX lab by the tenants. You incurred expenses in conducting environmental testing and repairs to the property because of how the property was used when it was tenanted.

You moved into the property on XX/XX/20XX and established it as your main residence.

Question 1

The items listed under the heading 'Expenses 1' are capital assets, therefore the expenses incurred to replace them are not deductible as repair expenses under section 25-10 of the ITAA 1997.

A deduction is allowable for the expenses under section 40-25 of the ITAA 1997 for depreciating assets.

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 Taxation Ruling IT 180, 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

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.