Private ruling: Rental expenses
Date of advice: 10 July 2018
Published: September 2018
Ruling period: Year ended 2018 | Year ended 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to claim vehicle travel expenses for repairs to your rental ‘property one’? | A1: No | Q2: Are you entitled to claim rates, utility and insurance costs for your two rental properties while they were under repair? | A2: Yes

Relevant facts and circumstances: You are the sole owner of two rental properties in which you undertake a variety of activities that require you to travel reasonable distances. You are not in the business of letting rental properties. All properties are rented at market value. Property one: ● you rented a property ● the property was vacant due to repairs and maintenance from damages caused by tenants ● repairs were required after tenants left due to damage they caused ● the property was vacant for some time while you completed these repairs ● you travelled to the property to conduct the repairs ● the property was relisted for rent and was tenanted some time later ● you incurred all costs associated with the electricity, water, council rates and insurances during the period the property was vacant ● this property has never been your main residence and is purely an investment property Property two: ● was vacated by tenants prior to the end of the lease ● you eventually regained possession of the property which had been damaged during the tenancy ● you have negotiated with the insurance company in regards to what repairs they will pay for ● you are awaiting the insurance company to engage a builder to complete the repairs ● you will relist the property for rent upon completion of the repairs and maintenance ● there are no travel costs associated with this property ● you incurred all costs associated with the electricity, water, council rates and insurances during the period the property was vacant ● this property has never been your main residence and is purely an investment property

Relevant legislative provisions: Income Tax Assessment Act 1997 section 26-31 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: You are no longer able to claim deductions for the cost of travel you incur relating to residential rental properties from 1 July 2017. You can claim ongoing costs for expenses incurred on property one and property two during the period the properties were undergoing repairs and was not deriving rental income. | Detailed Reasoning - Travel expenses: You believe that you should be able to claim the travel up to the date that the legislation received royal ascent this being 30 November 2017. The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 received royal assent on 30 November 2017 to disallow any deductions for cost of travel you incur relating to a residential rental property. The application of the amendment applies to a loss or outgoing incurred and is effective from on or after 1 July 2017. Section 26-31(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states you cannot deduct a loss or outgoing you incur after 1 July 2017 as: ● It is related to travel, ● If it is incurred in gaining or producing your assessable income from the use of residential premises as residential accommodated, and ● It is not necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. You are no longer able to claim deductions for the cost of travel you incur relating to residential rental properties unless you are carrying on a business of letting rental properties. | Detailed Reasoning - Expenses during repair period: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing your assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. However there are also provisions in income tax laws which deal with specific deductions, including repairs and capital works (section 25-10 and Division 43 of the ITAA 1997). You can claim expenditure such as interest on loans, local council, water and sewerage rates, electricity and gas, land taxes and emergency services levy you have incurred during repairs to a property you intend to rent out. However, you cannot claim deductions from the time your intention changes, for example if you decide to use the property for private purposes. For property one the intention never changed from it being an investment property and when the repairs were completed the property was re-let by a new tenant. For these reasons the property is considered to be held for income producing purposes. For property two your intention is for it to remain an investment property and when the repairs are completed the property will be re-let by a new tenant. For these reasons the property is considered to be held for income producing purposes. If however, at any time, you use the property for private purposes then you cannot claim deductions from the time your intention changes. The same principles apply as per Tax Ruling 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities.