Private ruling: Rental property deductions
Date of advice: 18 September 2017
Published: January 2018
Ruling period: Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a deduction for rental property expenses incurred during the period improvements are being carried out on the property? | A1: Yes

Relevant facts and circumstances: You have a rental property which has been rented for the past number of years. You intend on carrying out improvements on the rental property. It is anticipated that the improvements will take up to six months to be completed. The property will not be tenanted while the improvements are being carried out. You intend on renting the property out once the improvements have been completed. You wish to claim a deduction for rates, land tax, insurance and depreciation on the building while the property is not tenanted.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: 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)). | Detailed Reasoning - Rental property expenses: In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 ( Steele ), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. It follows from Steele that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances: ● the interest is not incurred too soon, is not preliminary to the income earning activities and is not a prelude to those activities ● the interest is not private or domestic ● the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost ● the interest is incurred with one end in view, the gaining or producing of assessable income, and ● continuing efforts are undertaken in pursuit of that end. While Steele dealt with the issue of interest on land intended to be developed, the principles can be equally applied to other types of expenditure including council rates, land tax and insurance incurred during a period repairs and improvements are being carried out to a rental property. In your case, the expenses (rates, land tax and insurance) you incurred on the rental property during the construction period are not considered preliminary or to have been incurred too soon as they were incurred for the sole purpose of producing assessable income. In addition, there is no private or domestic purpose for holding the property as the property is used for the sole purpose of producing assessable income. While the income stream from the property has ceased for approximately six months while the repairs and improvements are undertaken, this period is not considered to have been so long that the necessary connection between the outgoings and the assessable income is lost. As the property will be made available for rental immediately following the completion of the works it is accepted that continuing efforts have been undertaken in the pursuit of gaining or producing assessable income. As such, you are entitled to a deduction under section 8-1 of the ITAA 1997 for your share of the rental property expenses incurred during the period repairs and improvements are being carried out on the property. | Detailed Reasoning - Capital works – temporary cessation of use: Division 43 of the ITAA 1997 provides deductions for certain capital expenditure on assessable income producing buildings and other capital works, and provides the rules for working out those deductions. This Division applies to capital works being a building, or an extension, alteration or improvement to a building begun in Australia after 21 August 1979. Capital works are taken to be used, or available for use, for a particular use or in a particular manner, if the use of those capital works for that purpose or in that manner temporarily ceases because of the making of repairs or improvements to the capital works (section 43-165 of the ITAA 1997). As you intend to use the property for the same purpose as you used it before the work to repair and improve it commenced, and you intend to make it available for rental immediately following the completion of the work, the property is taken to be used or available for that purpose during the period repairs and improvements are being carried out on the property. Therefore, you are entitled to include the period the repairs and improvements are being carried out on the property when calculating your capital works deduction.