Private ruling: Deductions for rental property expenditure
Date of advice: 4 June 2020
Published: July 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner allow a deduction for rental property expenditure when no rental income was received in that financial year? | A1: No

Relevant facts and circumstances: You inherited the property at XXX ('the property'). Since you took ownership of the property it has been rented or available to rent until XX 20XX when the most recent tenants were forcibly evicted. These tenants proved to be extremely difficult, refusing to pay rent for some time and ignoring your attempts to evict them. Their last rental payment was received on XX 20XX. After the tenants were evicted the property needed to be professionally cleaned before it was able to be inhabited or sold. You provided a quote from XXX dated XX 20XX for $XXXX for the full renovation of the property. You also provided a quote from XXX dated XX 20XX for $XXXX for the full remedial clean of the property. The repairs and renovations were carried out and the property was cleaned. The property was not rented or available for rent during that financial year and after the renovation and clean-up of the property it was sold in XXX 20XX. You received a reimbursement, after the property was sold, of the unused portion of the building insurance premium paid.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 section 40-755

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to the property used for income producing purposes, to the extent that the expenditure is not capital in nature. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable. It states you can deduct repair expenditure if, when you incurred the expenditure, you held or used the property bona fide for income purposes. Repair costs are deductible, if you no longer rent the property, where they are incurred during the income year the property was income-producing and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. | Detailed Reasoning - Application to your circumstances: You advised the last rent was received from the tenants on XX XXX 20XX. The tenants remained in occupation of the property from XXX 20XX until they were forcibly evicted on XX XXX 20XX. You were unable to collect any rental income during this period. After the tenants were evicted it was discovered the property needed to be professionally cleaned before it was able to be inhabited or sold. The repairs and renovations were carried out and the property was cleaned during the 20XX-XX financial year. You provided a statement from XXX showing all the payments for the work carried out were made between XX XXX 20XX and XX XXX 20XX. The property was not available for rent during that financial year and the property was sold in XXX 20XX. The repair costs were not incurred during the period the property was held for income producing purposes and are therefore not deductible. The expenditure may however be included in the cost base for capital gains tax.