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Edited version of your written advice
Authorisation Number: 5010053990944
Date of advice: 12 October 2018
Ruling
Subject: Compensation for damages payment
Question
Are you eligible to claim a deduction for a compensation payment made to the owner of a neighbouring property for water damage caused by your rental property?
Answer
Yes.
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that 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.
Expenses that are 'incidental and relevant' to the taxpayer's income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction under section 8-1 of the ITAA 1997 (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).
In your case, the water damage caused to the neighbouring property occurred while your property was earning assessable rental income. Therefore the expense to compensate for the damage is accepted as being incidental and relevant to your income earning activities.
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commenced on:
1 July 2017
Relevant facts and circumstances
You own an investment property which has been rented since purchase.
A defect in your property caused water damage to another property.
You received a state Administrative Tribunal order to repair your property and compensate the damage.
The compensation cost to you was not covered by your insurance.
You have been unable to recover any amount from the builder.
Relevant legislative provisions
Income Tax assessment Act 1997 Section 8-1