Private ruling: Rental property expenses
Published: February 2015
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for your share of the interest on a loan, water rates, council rates and building insurance until the date you stopped using your investment property for income producing purposes? | A1: Yes | Q2: Are you entitled to a deduction for your share of the decline in value for depreciating assets, and the capital works deduction for the roof, until the date you stopped using the property for income producing purposes? | A2: Yes | Q3: Are you entitled to a deduction for your share of the balancing deductions for the depreciating assets and roof that were destroyed when the house was demolished? | A3: Yes

Relevant facts and circumstances: You own a residential property jointly with your spouse. You borrowed money jointly to acquire the property. When the property was acquired the roof was damaged. The roof was replaced soon after you acquired the property You purchased replacement depreciating assets for use by the tenants of the property. You claimed decline in value deductions for the depreciating assets and capital works deductions for the new roof. The property was rented or available for rent from the date it was acquired until part way through the year ended 30 June 2013. The rental income for the part of the year ended 30 June 2013 that the property was rented was received in the year ended 30 June 2012 and you included your share of this rental income in your tax return for that year. You incurred expenses for interest on a loan, water rates, council rates and building insurance for the part of the year ended 30 June 2013 that the property was rented The dwelling on the property was demolished and the roof and depreciating assets were destroyed. You did not receive any insurance, salvage receipts or any other amounts for the destroyed roof or depreciating assets. The adjustable values of the depreciating assets were more than their termination values. You had an amount of undeducted construction expenditure for the dwelling at the date of its demolition. The demolished dwelling was not used for any purpose after the tenants vacated. A new dwelling was built on the land that is used as your main residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 subsection 40-25(7) | Income Tax Assessment Act 1997 paragraph 40-85(1)(c) | Income Tax Assessment Act 1997 subsection 40-85(2) | Income Tax Assessment Act 1997 section 40-285 | Income Tax Assessment Act 1997 paragraph 40-285(2)(b) | Income Tax Assessment Act 1997 section 40-295 | Income Tax Assessment Act 1997 subsection 40-300(2) | Income Tax Assessment Act 1997 section 43-10 | Income Tax Assessment Act 1997 section 43-40 | Income Tax Assessment Act 1997 section 43-70 | Income Tax Assessment Act 1997 subsection 43-115(1) | Income Tax Assessment Act 1997 section 43-250 | Income Tax Assessment Act 1997 section 43-255

Reasons for decision: Detailed Reasoning - Deductibility of interest, water rates, council rates and building insurance: You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital or private in nature (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)). In your case, you used the property to produce assessable income for part of the year ended 30 June 2013, albeit that the rental income was included in your assessable income for the year ended 30 June 2012. You are entitled to a deduction for your share of interest on a loan, water rates, council rates and building insurance for the period that the property was income-producing. | Detailed Reasoning - Decline in value deductions: You can deduct an amount equal to the decline in value for an income year of a depreciating asset to the extent that it is used for a taxable purpose (section 40-25 of the ITAA 1997). A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997). As you used the depreciating assets to produce rental income you are entitled to a deduction for your share of the decline in value of these two assets up until the date you stopped using the assets to produce assessable income. | Detailed Reasoning - Balancing adjustment events: When you stop holding a depreciating asset, such as when it is destroyed, a balancing adjustment event occurs (section 40-295 of the ITAA 1997). The amount of the balancing adjustment is calculated by comparing the asset's termination value with its adjustable value (section 40-285 of the ITAA 1997). The termination value of a depreciating asset that is lost or destroyed is the amount or value received or receivable under an insurance policy or otherwise for the loss or destruction (item 8 in the table in subsection 40-300(2) of the ITAA 1997. The adjustable value of an asset at a particular time is the opening adjustable value for that year plus any second element costs for the year, less its decline in value for the year up to that time (paragraph 40-85(1)(c) of the ITAA 1997). The opening adjustable value of a depreciating asset for an income year is its adjustable value to you at the end of the previous income year (subsection 40-85(2) of the ITAA 1997). If the termination value of the depreciating asset is less than its adjustable value, the difference is deductible in the income year in which the balancing adjustment event occurred (paragraph 40-285(2)(b) of the ITAA 1997). In your case a balancing adjustment event occurred for the depreciating assets when they were destroyed during the demolition of the dwelling. As the termination values of the depreciating assets were less than their respective adjustable values you are entitled to a deduction for your share of the differences in the year that the assets were destroyed. | Detailed Reasoning - Capital works deductions - new roof: You can deduct an amount for capital works in an income year if: • the capital works have a 'construction expenditure' area • there is a 'pool of construction expenditure' for that area, and • you use 'your area' in the income year to produce assessable income (section 43-10 of the ITAA 1997). 'Construction expenditure' is capital expenditure incurred in respect of the construction of capital works (subsection 43-70 of the ITAA 1997). A 'pool of construction expenditure' is so much of the construction expenditure incurred by an entity on capital works as is attributable to the construction expenditure area. 'Your area' is the part of the construction expenditure area that you own (subsection 43-115(1) of the ITAA 1997). 'Your construction expenditure' is the portion of the pool of construction expenditure that is attributable to your area. As construction expenditure has been incurred to build capital works (the new roof) and you used those capital works to produce assessable income, you are entitled to claim your share of capital works deductions up to the date that the capital works were used to produce assessable income. | Detailed Reasoning - Balancing deduction - destroyed capital works (roof): Where capital works are destroyed, either voluntarily or involuntarily, a balancing deduction is allowed provided that: • you have been allowed, or can claim, a capital works deduction for the capital works • there is an amount of undeducted construction expenditure for those capital works, and • you were using the capital works to produce assessable income immediately before the destruction or, if not, neither you nor any other entity used the capital works for any purpose since they were last used by you to produce assessable income (section 43-40 of the ITAA 1997). The amount of the balancing deduction is calculated using the formula set out in section 43-250 of the ITAA 1997. Generally, the deduction is equal to the undeducted construction expenditure at the date of the destruction of the capital works less amounts you have received or have the right to receive for the destruction of the capital works (section 43-255 of the ITAA 1997). In your case you were claiming your share of capital works deductions for the roof on your jointly owned rental property and there was an amount of undeducted construction expenditure for the roof when the dwelling was demolished. Neither you nor any other entity used the dwelling for any purpose since it was last used by you to produce assessable income. As such you are entitled to your share of the balancing deduction for the destroyed roof in the year ended 30 June 2013.