Private ruling: Deductibility of compensation paid to tenant
Date of advice: 27 July 2016
Published: September 2016
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you eligible to claim a deduction for the payment made to a tenant who was released from a fixed period lease due to maintenance work? | A1: Yes.

Relevant facts and circumstances: You have a rental property which needed significant maintenance work part way through a fixed term tenancy. The repair company advised you that the work would take at least 6 weeks to complete. An offer of rent reduction was refused by the tenant as they were concerned with the intrusiveness of the repairs, and preferred temporary accommodation. Your managing agent attempted to find short term accommodation in the area, but none which suited both the tenant and your budget could be found. The tenant agreed to vacate the property and terminate the lease. Your agent then negotiated a compensation payment with the tenant. The tenant requested compensation for removal costs, relocation of utilities, and time spent searching for another property. Your agent consulted the Office of Fair Trading and other real estate professionals before making the compensation offer.

Relevant legislative provisions: Income tax Assessment Act 1997 Section 8-1

Reasons for decision: Detailed Reasoning - Compensation expense: 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). Therefore, providing the expense can be objectively viewed as a necessary or natural consequence of the taxpayer's income earning activities, the expense will be 'incidental and relevant' to the income earning activities of the taxpayer. In your case, as a landlord, it is expected that you are to provide premises which are fit for occupation. Due to the extent and nature of the maintenance required, you released the tenants from their lease without penalty. You compensated your tenants for relocation expenses, non-accessibility of one of the rooms, relocation of utilities, time spent searching for another property, and an additional amount. In these circumstances your expenditure can be viewed as a natural consequence of your income earning activities as a landlord and therefore 'incidental and relevant' to the derivation of rental income. Accordingly, you are entitled to a deduction for the expenditure incurred for compensation paid to your tenants under section 8-1 of the ITAA 1997.