Private ruling: Rental property deductions
Date of advice: 6 November 2015
Published: November 2015
Ruling period: Year ended 30 June 20YY | Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you able to claim an immediate deduction for any of the costs of rectifying building faults on your rental property? | A1: No. | Q2: Are you able to claim depreciation deductions for any of the costs of rectifying building faults on your rental property? | A2: No. | Q3: Are you able to claim deductions under the capital allowance provisions for any of the costs of rectifying building faults on your rental property? | A3: No.

Relevant facts and circumstances: You own a rental property. The property was constructed in the relevant year. In the construction industry, builders pay insurance to a State insurance body (insurer). In 20XX, your property showed significant building issues and the insurer agreed to remedy these issues. The insurer gave the tender for works on your property to a company doing the relevant type of work. The works were monitored by an engineering company. The repairs were completed in late 20YY, with some cosmetic work to be attended later. The cost of the work was approximately $X, paid in stages, over eight weeks. Your approval and signature (as owner of the property) was required for each stage. You did not incur any costs in relation to the works carried out to rectify the defects in your property as the insurer covered all costs in relation to this. You have submitted - a structural and geotechnical report, plumbing reports including photos of identified issues, termite certificates and insurer inspection certificates to support your application.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature. Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to income producing premises and depreciating assets provided the expenditure is not capital in nature. Generally, a deduction is allowed for expenditure on repairs related to the period of time during which the property is held or used for producing assessable income. Where the repairs involve capital expenditure, these expenses are not allowable under section 25-10 of the ITAA 1997. However, capital expenditure may be: • allowable as a deduction under the capital works provisions; or • added to the cost base of the property for capital gains tax purposes | Detailed Reasoning - Meaning of 'Incurred': Taxation Ruling TR 97/7 discusses the meaning of incurred: 3. To qualify for deduction under section 8-1 a loss or outgoing must have been incurred. | Detailed Reasoning - Incurred: 4. There is no statutory definition of the term 'incurred'. 5. As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. But this broad guide must be read subject to the propositions developed by the courts, which are set out immediately below. 6. The courts have been reluctant to attempt an exhaustive definition of a term such as 'incurred'. The following propositions do not purport to do this, they help to outline the scope of the definition. The following general rules, settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred: (a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum; (b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others; (c) a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities); (d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise; (e) in the case of a payment made in the absence of a presently existing liability(where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid In your case, you have not incurred any costs. The expenses incurred in rectifying the faults in your rental property were not borne by you. You were not required to outlay any money towards the works completed at the property as the insurer covered all costs. You were required to sign-off on the works as an acknowledgement of completion only. It follows that you are not entitled to a deduction for any of the costs of the repair works to your rental property as immediate repairs, as depreciation, or as capital works deductions.