Private ruling: Expenses incurred - rental property - before genuinely available for rent
Date of advice: 30 April 2020
Published: June 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are repair and maintenance costs deductible if they are incurred before the property was made available for rent? | A1: No.

Relevant facts and circumstances: You moved out of your private residential home and planned to find tenants to rent the property. A real estate agent emailed you with recommended repairs and maintenance to be completed before marketing the property for rent. You incurred expenses for repairs and maintenance on the property. You signed a rental agreement with the real estate agent to have your property made available for rent. The property was tenanted approximately 2-3 week later.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income tax Assessment Act 1997 Section 25-10

Reasons for decision: Summary: 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 assessable income, except where the outgoings are of a capital, private or domestic nature. Section 25-10 of the ITAA 1997 states you can deduct expenditure you incur for repairs to premises that you held or used solely for the purpose of producing assessable income. However, it denies deductions for capital expenditure. Taxation Ruling 97/23 discusses the deductibility of repairs. Paragraph 75 states repair expenditure incurred in a year of income before property is held, etc., for income purposes is not deductible under section 25-10. Paragraph 145 states that under section 25-10, a deduction is allowed for expenditure for repairs to property held, etc., for income purposes. Expenditure incurred in repairing property is not deductible if the property is not held, etc., nor ever has been held, etc., for income purposes. Furthermore, the expenditure is likely to be capital expenditure. If it is, the exception for capital expenditure operates to deny a deduction. As the Administrative Appeals Tribunal (Mr PM Roach, Senior Member) said in Case V167 88 ATC 1107 at 1111; AAT Case 12 (1986) 18 ATR 3056 at 3059: If a taxpayer buys a property with the view to letting it at a rent and immediately paints it throughout before letting it, the expenditure may be fairly characterised as capital... Example 16 at paragraph 182 demonstrates that repair costs incurred before a property is available for rent are not deductible as they are capital in nature: Mary-Ellen Walton, after the death of her spouse, decided to move out of the long-held family home and to rent it to tenants. She leaves the property on 15 July 1996. To make it more attractive for prospective tenants, Mary-Ellen undertakes major repairs and renovations to the house between August 1996 and February 1997. She places the house in the hands of a real estate agent on 15 March 1997 and lets the house to tenants on 1 April 1997. The costs of the repairs and renovations are not deductible under the old law. When the costs were incurred, Mary-Ellen was not holding or using the house to produce rental income. The costs are an expense in preparing the house for producing rent. They are of a capital nature. As shown above, the expenses are not considered to be incurred while the property is being held to produce rental income. The costs are an expense in preparing the house for producing rent and therefore considered capital in nature and not deductible. In your case, the repairs and maintenance expenses were incurred before the property was made available for rent. Accordingly, the expenses are not deductible under either section 25-10 or section 8-1 of the ITAA 1997.