Private ruling: Rental property expenses
Published: January 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for your entire share of the repair expenses for a property you rented to a relative? | A1: No.

Relevant facts and circumstances: You and your relative purchased your parents property. You intended to rent it out for a period and then sell it. Once the property was sold you had intended to share the proceeds with your other relative. The property required a significant amount of repair and work before it would be in a position to rent on a commercial basis. Your relative agreed to rent a portion of the property whilst the repair work was undertaken. A tenancy agreement was duly prepared and signed. Your relative did not pay bond. The process of getting your relative to pay rent became problematic. You pursued the payment of rent continuously in the early months and occasionally received payment. You and your relative decided to deduct any unpaid rental amounts from the proceeds you intended to share with the relative when the property was sold. Much of the work has now been completed and the property is rented on a commercial basis.

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

Reasons for decision: Summary: Section 25-10 of Income Tax Assessment Act 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 considers initial repairs which is expenditure to remedy defects, damage or deterioration in existence at the date of acquisition. Paragraph 59 of TR 97/23 states that: Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. In this case, you stated that the property required a significant amount of repairs and work before it would be in a position to rent on a commercial basis. We consider that this work would be initial repairs as the defects or damage was in existence at the date of acquisition. Therefore, you are not entitled to a deduction under section 25-10 of the ITAA 1997.