Private ruling: Rental deductions
Date of advice: 28 March 2018
Published: June 2018
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a claim the ongoing cost of ownership under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) relating to your rental property in the year when it was not rented? | A1: Yes | Q2: Are you entitled to a claim deductions for repairs under section 25-10 of the ITAA 1997 relating to your rental property in the year when it was not rented? | A2: Yes, however the deductions were claimed for repairs in the 201X-1X income year and there are no deductions to be claimed in the next income year. | Q3: Are you entitled to claim deductions for decline in value of depreciating assets under section 40-25 of the ITAA 1997 relating to your rental property in the year when it was not rented? | A3: Yes | Q4: Are you entitled to a claim deductions for capital works under section 43-10 of the ITAA 1997 relating to your rental property in the year when it was not rented? | A4: Yes. You can claim the costs of the capital works in each income year as outlined in the quantity surveyors report.

Relevant facts and circumstances: You purchased residential property in 200X. The property address is Street No. X Street Name: XX Suburb: X State: X Postcode: X The property’s sole use, since purchased date, is for investment purposes. The property has been rented since purchase and was never your main residence. In 201X a small renovation was commenced which included removing wallpaper which revealed asbestos and also termite damage. The nature of the work involved resulted in the property becoming inhabitable by a tenant. The existing tenants were required to vacate the property. Events relating to the period of time where the property was not rented, as below; ● The pre-renovation lease ended on X X 201X (notice given by tenant); ● The renovation work was completed to an extent enabling marketing on X X 201X, when X connected the power; ● You advised the agent of this on X X 201X; ● Rental marketing began on X X 201X (online advertisement); ● Practical completion agreed with builder on X X 201X; ● The post renovation lease started on X X 201X (at a higher rental amount). During the period the repairs took place the property was vacant and no rental income was derived from the property. The revised Tax depreciation quantity surveyor schedule details the amount of $X pertaining to capital works and; 100% of the deductible repair items were claimed in the 201X-1X income tax return.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 section 43-10

Reasons for decision: Summary: You can claim ongoing ownership costs for expenses incurred during the period the property was undergoing renovations and was not deriving rental income | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (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 renovations 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. The intention never changed from it being an investment property and when the renovations were completed the property was re-let by a new tenant quickly and at a higher rental amount. For these reasons the property is considered to be held for income producing purposes. The same principles apply as per TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities In your case, your intention never changed from the property being used as a rental property and when renovations were competed the property was re-let by a new tenant in a reasonable time. For this reason, the property is considered to be held for income producing purposes. | Summary: You will be entitled to repairs for replacement or renewal of a worn out or broken part during that period | Detailed Reasoning - Detailed reasoning: Repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property. Repairs involve replacing worn or damaged curtains, blinds or carpets between tenants. Maintenance involves keeping the property in a tenantable condition and this involves repainting faded or damaged interior walls. Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs , discusses the circumstances in which expenditure incurred for repairs may or may not be an allowable deduction under section 25-10 of the ITAA 1997. In your case, all repair costs were incurred and claimed in the 201X-1X income year with no additional repairs incurred in the next year. Therefore, there are no repair expenses to claim as a deduction in the 201X-1X income year. | Summary: You can claim decline in value on the following plant and equipment expenses incurred during that period | Detailed Reasoning - Detailed reasoning: Section 40-30 of the ITAA 1997 identifies a depreciating asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except: (a) land; or (b) an item of * trading stock; or (c) an intangible asset, unless it is mentioned in subsection (2) The tax depreciation quantity surveyor report outlined a list of items that could be claimed using the diminishing value method. These costs will be allowable. | Summary: You can claim capital works for the building, structural improvements and fixed assets of the property | Detailed Reasoning - Detailed reasoning: Section 43-10 of the ITAA 1997 provides a deduction for capital expenditure on capital works used to produce assessable income. A deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. This is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works. Capital works includes buildings and structural improvements and also extensions, alterations or improvements to buildings and structural improvements. Initial repairs are also considered capital in nature and are therefore capital works. Improvements to items that form part of the structure of a rental property and that are attached to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997 Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5% over 40 years In your case, the tax depreciation quantity surveyor report and the capital works reconciliation report outlines the amount of $X pertaining to capital works under Division 43 of the ITAA 1997. Therefore, you can claim capital works amounts over a period of time as outlined in the quantity surveyor report