Private ruling: Rental property deductions
Date of advice: 20 February 2023
Published: 11 April 2023
Ruling period: Year ended DD MM 20YY
Date scheme commenced: DD MM 20YY

Ruling: Q1: Are you entitled to claim a deduction for the cost of fixing and repainting the damaged ceilings and other marked and faded surfaces? | A1: Yes | Q2: Are you entitled to claim a deduction for the cost of replacing the carpets? | A2: No | Q3: Are you entitled to claim a deduction for the cost of re-laying the top surface of the deck? | A3: Yes

Relevant facts and circumstances: You purchased the property on DD MM 20YY. You are the sole owner of the property. The property was available for rent for the period DD MM 20YY to DD MM 20YY. It was managed by real estate agents for the entire period. It was rented to X different tenants during this time, of which you had a landlord/tenant's relationship only. The property was only vacant for a few weeks between tenants in 20YY. You have not used the property for personal purposes during the period it was available for rent. There was a leak in the bathroom, which you had repaired in MM 20YY. However, the paintwork and ceiling remained damaged. On DD MM 20YY you were informed of another leak in the main bedroom from the outside roof. You were unable to get people in to repair this leak as the tenant refused anyone entry to the property due to Covid-19. Between MM 20YY and MM 20YY, you attempted to evict your tenant. You ended up taking the tenant to the tribunal so they would be evicted. You ended up gaining access to the property in MM 20YY. Once you had access to the property the ceiling upstairs had dissolved and become thin and had deteriorated and gone mouldy. The carpet smelt like mildew. The roof was repaired by the body corporate and you had the ceilings fixed upstairs in the bedroom and in the downstairs toilet which was damaged from the bathroom leak from 20YY. You then had these rooms repainted. You had the carpet replaced upstairs. The outside deck had not been maintained at all during the Covid period and there were burn marks on the decking. You got quotes to sand and restore the decking surface, but it was going to be cheaper to replace the pine surface. You got the deck re-topped with pine. You re-oiled the deck. You received rental income within the 20YY financial year. All the expenses were incurred during the 20YY financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 section 8-1 Reason for decision | Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that expenditure incurred for repairs to premises held or used solely for the purpose of producing assessable income shall be deductible in the year in which the expenditure was incurred. Taxation RulingTR 97/23 - Income tax: deductions for repairs clarifies that to be deductible under section 25-10 of the ITAA 1997, the repair expenses must not be capital in nature, nor should they be incurred in improving the asset nor renewing the asset in its entirety. | Section 25-10 of the ITAA 1997 allows repair costs of a rental property to be deducted to the extent that the repairs relate directly to a period in which the property is used for income producing purposes. Taxation Ruling TR IT 180 - Repairs to property carried out after cessation of income production clarifies that this applies even to repairs which are undertaken after the cessation of income production, providing that the necessity for the repairs can be related to the period of income production, and that the property has produced assessable income during the year in which the expenditure was incurred. | Section 8-1 of the ITAA 1997 provides that losses or outgoings are deductible to the extent that they are incurred in the gaining or production of assessable income, except where the outgoings are of a capital, private or domestic nature. | Application to your circumstances | The work undertaken to remedy the water damage to the ceiling and other surfaces at the rental property was not an improvement of the premises nor can the expense be characterised as an outgoing of a capital nature. Therefore, it is accepted that the nature of the expenditure was that of rental repairs as explained in TR 97/23. The property was used to produce income during the 20YY income year, therefore expenses incurred in this year are deductible in that year under section 25-10 of the ITAA 1997. | Carpet is considered a depreciating asset and replacement of the whole is a capital expense, rather than a repair. It is only repairs attributable to the period the premises were used to produce income that can be claimed after the cessation of income producing activities. Depreciation on the replacement carpet relates to its decline over time and is attributable to the ongoing use of the carpet after the cessation of income earning activity. | Re-layering the top surface of a deck and oiling and staining it constitutes a repair. The repairs were not a renewal of any entirety, nor were they an improvement of the premises nor can the expense be characterised as an outgoing of a capital nature. Therefore, it is accepted that the nature of the expenditure was that of rental repairs as explained in TR 97/23. The property was used to produce income during the 20YY income year, therefore expenses incurred in this year are deductible in that year under section 25-10 of the ITAA 1997.

Reasons for decision: Summary: Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that expenditure incurred for repairs to premises held or used solely for the purpose of producing assessable income shall be deductible in the year in which the expenditure was incurred. Taxation RulingTR 97/23 - Income tax: deductions for repairs clarifies that to be deductible under section 25-10 of the ITAA 1997, the repair expenses must not be capital in nature, nor should they be incurred in improving the asset nor renewing the asset in its entirety. Section 25-10 of the ITAA 1997 allows repair costs of a rental property to be deducted to the extent that the repairs relate directly to a period in which the property is used for income producing purposes. Taxation Ruling TR IT 180 - Repairs to property carried out after cessation of income production clarifies that this applies even to repairs which are undertaken after the cessation of income production, providing that the necessity for the repairs can be related to the period of income production, and that the property has produced assessable income during the year in which the expenditure was incurred. Section 8-1 of the ITAA 1997 provides that losses or outgoings are deductible to the extent that they are incurred in the gaining or production of assessable income, except where the outgoings are of a capital, private or domestic nature. | Detailed Reasoning - Application to your circumstances: The work undertaken to remedy the water damage to the ceiling and other surfaces at the rental property was not an improvement of the premises nor can the expense be characterised as an outgoing of a capital nature. Therefore, it is accepted that the nature of the expenditure was that of rental repairs as explained in TR 97/23. The property was used to produce income during the 20YY income year, therefore expenses incurred in this year are deductible in that year under section 25-10 of the ITAA 1997. Carpet is considered a depreciating asset and replacement of the whole is a capital expense, rather than a repair. It is only repairs attributable to the period the premises were used to produce income that can be claimed after the cessation of income producing activities. Depreciation on the replacement carpet relates to its decline over time and is attributable to the ongoing use of the carpet after the cessation of income earning activity. Re-layering the top surface of a deck and oiling and staining it constitutes a repair. The repairs were not a renewal of any entirety, nor were they an improvement of the premises nor can the expense be characterised as an outgoing of a capital nature. Therefore, it is accepted that the nature of the expenditure was that of rental repairs as explained in TR 97/23. The property was used to produce income during the 20YY income year, therefore expenses incurred in this year are deductible in that year under section 25-10 of the ITAA 1997.