Private ruling: Rental Expenses
Published: June 2014
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 following costs incurred on your rental property: • replacing heat pot stand • replacing damaged tiles • fixing a blind • cleaning equipment and products • replacing bathroom plugs and accessories • painting • mending of a wall, window sill and architrave? | A1: Yes. | Q2: Are you entitled to a repairs deduction for the other work carried out on your rental property? | A2: No. | Q3: Are you entitled to claim a capital works deduction for the following expenditure incurred on your rental property: • new cupboards, splashback, taps, handles and sink • new down-lights • new towel rails and taps • new walk-in wardrobe shelving and wall mirror • relocation of a meter • new door handle? | A3: Yes. | Q4: Are you entitled to a deduction for the decline in value for the following: • new washing machine • new oven • new hob • new range hood • new hot water unit? | A4: Yes. | Q5: Are you entitled to a deduction for the travel costs incurred to inspect, organise and carry out repairs to your rental property? | A5: Yes. | Q6: Are you entitled to a deduction for the holding costs of your property during the period in which no income was derived? | A6: Yes.

Relevant facts and circumstances: You own an apartment. The apartment is a rental property that has been rented for many years. Due to heavy rain your property experienced flooding, damaging your rental property. Approximately 10 months after the rain damage your long term tenant gave notice that they were vacating the property due to the extensive construction and repairs being conducted on the units. Approximately 5 to 7 months later you had the following completed on the property: • fixed and cleaned a blind • replaced bathroom plugs, handrails and accessories • new handle installed on unit door Another month later you had a meter and hot water unit replaced prior to the other repairs being undertaken. The body corporate was responsible for the repairs to your property. However you purchased the following items: • new washing machine • new oven • new hob • new range hood • new cupboards, taps, handles and sink • new down-lights • replacement tiles It took the body corporate approximately two years to organise and complete the repairs it was responsible for to your property. Repairs had been completed on the property and you received the keys back from the body corporate approximately 2 years after the initial damage. You do not live in the same city as your rental property. To continue the repairs to your property you fly during periods you can obtain time off work. Over the next year you have the following done: • splashback fitted to the kitchen. • repairs started on a window and architrave. • walk-in wardrobe fitted with a mirror. • cleaned the property due to the condition it was left in from the previous tenant and builders. • obtained quotes for painting the property. • inspected the painting job and requested the painting be redone due to the poor quality of the job. • inspected the redone painting job. You feel you will need to rectify the errors yourself. The property remains untenanted since completing the above work. During the period the rental property has been untenanted, you continued to incur holding costs including body corporate fees, rates, water, gas and electricity fees. You intend to travel to the property in the next month to finalise the repairs and have the property tenanted.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 40-25 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 Section 43-10 | Income Tax Assessment Act 1997 Subsection 43-25(1) | Income Tax Assessment Act 1997 Section 43-30

Reasons for decision: Detailed Reasoning - Repairs: 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 Income tax: deductions for repairs (TR 97/23) explains the Commissioner's view of circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: • the extent of the work carried out represents a renewal or reconstruction of the entirety, or • the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or • the work is an initial repair. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. In your case you replaced the heat pot stand, damaged tiles and bathroom plugs and accessories. You also cleaned and fixed a blind and had the internal walls painted and a wall, window sill and architrave repaired. As the work completed restores the efficiency of the property and does not change the property's character the work is deductible as a repair under section 25-10 of the ITAA 1997. | Detailed Reasoning - Capital works: Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes. Subsection 43-25(1) of the ITAA 1997 states that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997). Kitchen, bathroom and relocated meter The kitchen is a separately identifiable capital item with its own function. As a consequence, it is an entirety in itself and its replacement is a renewal of the entirety. The expenditure is capital in nature and not a deductible repair ( Lindsay v Federal Commissioner of Taxation (1960) 106 CLR 377; 12 ATD 197; (1960) 8 AITR 99). However the expenditure is regarded as construction expenditure for which a deduction is available under Division 43 of the ITAA 1997. Therefore the costs of the new kitchen are capital in nature. Also the costs of kitchen fittings such as the down-lights are permanent fixtures to the property and are capital in nature. Similarly the bathroom fittings, unit door handle and walk-in wardrobe mirror represent an improvement and are therefore capital in nature. Such expenses are not deductible as repairs. However a capital works deduction is allowed under Division 43 of the ITAA 1997. The relocation of the meter is a separately identifiable capital item with its own function. As a consequence, it is an entirety in itself and its relocation is a renewal of the entirety. The expenditure is regarded as construction expenditure for which a deduction is available under Division 43 of the ITAA 1997. Depreciating assets Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose. The washing machine, oven, hob, range hood and hot water unit are all regarded as depreciating assets for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction when it is used for income producing purposes. Please note the assets are capital items and therefore not deductible as repairs under section 25-10 of the ITAA 1997. | Detailed Reasoning - Travel: Rental property expenses are deductible under section 8-1 of the ITAA 1997 for the period the property is rented or is available for rent. Generally, the cost of travel to inspect or maintain a rental property is an allowable deduction under section 8-1 of the ITAA 1997 as it has been incurred in connection with gaining income from the investment property. The publication Rental properties 2013 (NAT 1729-06.2013) is a guide to help owners of rental properties determine what expenses are allowable deductions. Page 13 of the guide explains that when a taxpayer travels to inspect or maintain a rental property, they may be able to claim a full deduction for the costs of the travel where the sole purpose of the trip related to the property. However, where the circumstances of the travel include private reasons (such as a holiday) or reasons of a capital nature (such as inspecting a residential property with a view to purchasing the property for income producing purposes) the taxpayer is only entitled to a partial deduction. In your case, you travelled to attend to matters of your rental property. Should there be no personal reasons for your trips you are entitled to a full deduction for your travel costs under section 8-1 of the ITAA 1997. | Detailed Reasoning - Holding costs: Section 8-1 of the ITAA 1997 allows a deduction for any losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed under section 8-1 of the ITAA 1997 for expenses to the extent to which they are of a capital, private or domestic nature. In this case the holding costs have been incurred in respect of a rental property which was uninhabitable for a period during which no assessable income was produced. The property had been rented prior to, with the outlook to rent the property after the property becomes inhabitable again. The principles relating to the deductibility of interest prior to using an asset to earn income was considered by the High Court in Steele v FC of T 99 ATC 4242 (1999) 41 ATR 139. The implications of this case are considered in Taxation Ruling 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities (TR 2004/4) . 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. In your case the holding costs incurred are not preliminary or of a private or domestic nature. The period of outgoings is not too long as to lose the necessary connection between the outgoing and assessable income and the holding costs are incurred with the view of gaining or producing assessable income. Continuing efforts were made in pursuit of that end. Therefore, the expenses of holding the property are an allowable deduction under section 8-1 of the ITAA 1997 during the period the property was uninhabitable.