Published: October 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for the decline in value of new carpet? | A1: Yes. | Q2: Are you entitled to balancing adjustment for the old carpet? | A2: Yes. | Q3: Are you entitled to a deduction for travel? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 | Income Tax Assessment Act 1997 Sections 40-280 to 40-370

Reasons for decision: Detailed Reasoning - New carpet: Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. Repair costs may be deductible where they are incurred to remedy damage that occurred during the period the property was used for income producing purposes even if the work takes place after the property ceases to be available for rent. TR 97/23 indicates that expenditure for repairs to property is capital in nature and is not deductible under section 25-10 of the ITAA 1997 if the extent of the work carried out represents a replacement, renewal or reconstruction of an entirety, rather than a replacement of subsidiary parts of a whole. An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1961) 106 CLR 377 at 385). TR 97/23 states that something will likely be considered an entirety if it is an item that is depreciable (a depreciating asset). Taxation Ruling TR 2013/4 lists carpet as a depreciating asset with an effective life of 10 years. Generally, you can claim a deduction for the decline in value of a depreciating asset that it held for income producing purposes. In your case, the replacement of the carpets is regarded as the replacement of an entirety. As such, the expense is capital in nature and not deductible under section 25-10 of the ITAA 1997. However, as the carpet has an effective life of ten years, you are able to claim a deduction for its decline in value pro rated for the time that the property was rented or available for rent. | Detailed Reasoning - Old carpet: Subdivision 40-D (sections 40-280 to 40-370) of the ITAA 1997 relates to balancing adjustments for depreciating assets. Section 40-285 of the ITAA 1997 provides that if: · a balancing adjustment event occurs for a depreciating asset held by a taxpayer; and · the taxpayer worked out the asset's decline in value under subdivision 40-B; and · the asset's termination value is less than its adjustable value just before the event occurred; You can deduct the difference between those amounts in the income year in which the event occurred. When a depreciating asset is sold or disposed of, a balancing adjustment event may occur. You work out the balancing adjustment amount by comparing the assets termination value (such as the proceeds from the sale of an asset) and its adjustable value at the time of the balancing adjustment event. The termination value is, generally, what you receive or are taken to receive for the asset when a balancing adjustment occurs (for example, the proceeds from selling an asset). If the proceeds from selling or disposing of the asset are less than the written down value of the asset, the difference is included as a deduction. In your case, as you disposed of the carpet it had no termination value. Therefore, you are entitled to a deduction for the written down value of the old carpet. | Detailed Reasoning - Travel: 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 assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Expenditure on the daily necessities of life (for example, accommodation, food and drink) is generally not deductible as it is not incurred in gaining or producing assessable income and is also considered to be private or domestic in nature. Exceptions to this are where you are undertaking work related travel and are required to stay away overnight. Section 900-50 of the ITAA 1997 provides that the substantiation requirement to obtain written evidence does not apply to claims by employee taxpayers for expenses covered by a bona fide travel allowance if the amount of the claim for expenses incurred does not exceed the amount the Commissioner considers reasonable. In your case, it is considered that your travel is work related. However, as you do not receive a bona fide travel allowance for your travel, you are not entitled to use the exception from substantiation provisions. Therefore, you are entitled to a deduction for the cost of accommodation and meals that you are able to substantiate.

Rental property: You acquired a property in May 2011. | The previous owner had replaced the carpet immediately prior to selling it to you. | The property was available for rent from settlement. | When the tenant moved out, you had to replace the carpet because it was badly stained. | You tried unsuccessfully to find another tenant for the property. | After a time, you moved back into the property. | You are employed as an employee. | Your office is in State A. | Approximately twice a month, you travel to City A to visit clients and you work either at the client's office or in your employer's office in a spare desk. | Your stay in City A is either one or two nights and while there, you board with friends. | No part of your travel is for private purposes.