Edited version of private advice

Authorisation Number: 1052393245002

Date of advice: 12 May 2025

Ruling

Subject: Rental expenses - renovation costs

Question 1

Can you claim a deduction for the expenses incurred in renovating your XX in your property whilst it was not genuinely available for rent for the 20XX-XX income year?

Answer 1

No. The repairs or maintenance need to be done during the period that the property is genuinely available for rent, otherwise it is seen as a private expense and capital in nature.

Question 2

If the answer to Question 1 is No, could you please advise if this expense could be claimed in later income years and how much they can claim?

Answer 2

No. The repairs or maintenance need to be done during the period that the property is genuinely available for rent, otherwise it is seen as a private expense and capital in nature.

As you have used the property as a 'main residence' up to and during when the renovations were undertaken and the property was not available for rent, the expenses incurred will not be able to be claimable when incurred or at a future date. The cost of the renovations should be added to the cost base of the property for Capital Gains Tax (CGT) purposes.

This ruling applies for the following period:

Year ending XX XXXXX 20XX

The scheme commenced on:

XX XXXXX 20XX

Relevant facts and circumstances

You currently reside at the Property.

This property is your main residence and office.

You claim XX.XX% in running expenses.

You have undertaken a renovation with the intention of renting the property upon completion.

The renovation involved repairing and upgrading items to enhance the property for rental purposes.

You have provided invoice number XXXX for $XX, XXX.XX to substantiate the expense.

The renovations included construction, replacement furnishings and flooring.

You and your family are still living in the property and have not made a clear plan on when to rent out the property.

You own two other properties, one in Country A and one in Country B.

You have not made the property available for rent.

You have not advertised the property for rent.

You had a valuation completed by a real estate agent, however, did not rent the property as the valuation was too low.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25.10

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 Tion NL v Commissioner of Taxation (Cth) [1949] HCA 15 where it was held that:

to come with 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

In determining whether an expense is deductible for income tax purposes it is necessary to establish a direct connection between holding a property to generate rental income and the expenses associated with holding that property. Where this connection has been established for a rental property, a landlord can deduct the expenses associated with holding that property to generate income. Examples of expenses that may be deductible under section 8-1 of the ITAA 1997 as general deductions include cleaning, council rates, insurance, interest in the mortgage, property management fees and strata fees.

Taxation Ruling (TR) 97/23 Income Tax: deduction for repairs - Property must be held or used bone fide for income purposes.

TR 97/23 paragraph 72, says you can deduct repair expenditure if, when you incurred the expenditure, you held or used the property bona fide for income purposes. We use the term 'bona fide' here because some arrangements may not result in an allowable deduction. For example, a taxpayer beachside apartment may have deteriorated over several years due to wear and tear arising from private use. If the taxpayer arranges to rent the apartment to family such as their adult child for a month, and during that month incur expenses to repair and paint the apartment, a deduction may not be allowable, under section 25-10 of ITAA 1997 for the repair and painting costs. The view taken, in appropriate circumstances is that no deduction is allowable either because:

a)            the apartment is not held for income purposes or

b)            part IVA of the ITAA 1936, may apply to the arrangement

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

The below are examples of expenses which are capital or of a capital nature:

•                     replacement of an entire structure or unit of property (such as a complete fence or building, stove, kitchen cupboards or refrigerator

•                     improvements, renovations extensions and alternations

•                     initial repairs, for example damage or deterioration that existed at the date you acquired the property

Genuinely available for rent

If the expense was for the purpose of producing rental income, you can claim a deduction. If not, the property rented needs to be genuinely available for rent, meaning that the tenant is renting the property or there are active and continuing effort to rent the property. Customarily, it is ensuring the property is being advertised to the public at appropriate market rates and that tenants are likely to rent it.

One guideline when considering the purpose of the expense claimed as a deduction is to determine whether the property was genuinely available for rent.

In Inglis Federal Commissioner of Taxation (1987) 87 ATC 037 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 be 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

•                     having regard to all the circumstances, and

•                     having conditions that are not so restrictive that tenants are likely to rent the property

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

Application to your circumstances

Rental expenses are deductible to the extent that they are incurred for the purpose of producing rental income. Repair or maintenance expenses may be deductible for periods when the property is not rented out providing that the property is genuinely available for rent.

In applying this to your circumstances, you have not advertised for tenants or generated any income from your property. As your property was not advertised it cannot be considered as being genuinely available or held to generate rental income.

At the time the renovations were completed to your bathroom and the cost for these renovations were incurred, you were living in the property and using it as your 'Main Residence'. Therefore, the renovation amount can be added to the cost base of the property for Capital Gains Tax (CGT) purposes, rather than claimed as a deduction. This is not a deductible expense, as the property was not genuinely available for rent when the expense was incurred in the 20XX-XX income year and is not able to be claimed in income years thereafter.