Private ruling: Rental deduction
Published: October 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the cost of replacing a depreciating asset after a rental property ceases to be rented or available for rent? | A1: No

Relevant facts and circumstances: You have a property which was rented for a period of time at the start of the relevant financial year. A depreciating asset installed in the property ceased to work during the period the property was rented You were not advised by the real estate managing your property that the depreciating asset had ceased to work You discovered that the depreciating asset did not work after you moved in to the property You purchased a new depreciating asset and incurred installation costs to replace the depreciating asset The property is no longer used to gain assessable income as you reside at the property

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 section 40-175 | Income Tax Assessment Act 1997 section 40-180

Reasons for decision: Summary: Deductions for capital expenditure on assets associated with residential rental properties will generally only be available under either: (a) Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) (for depreciating assets); or (b) Division 43 of the ITAA 1997 (for capital works). Division 40 of the ITAA 1997 provides a deduction for the decline in value of a depreciating asset, based on its effective life during the period it is being used to produce assessable income. Section 40-175 of the ITAA 1997 states that the cost of a depreciating asset consists of 2 elements. Section 40-180 of the ITAA 1997 explains that the first element is worked out at the time you began to hold the depreciating asset. It includes an amount you paid in relation to starting to hold the depreciating asset if that amount is directly connected with holding the asset, such as the cost of installation. Therefore the cost of installation would be included in the cost of the depreciating asset for the purposes of Division 40 of the ITAA 1997. A deduction for the decline in value of this depreciating asset would be allowed under Division 40 of the ITAA 1997 only while the residential property is rented or available for rent. In your case, the depreciating asset ceased working while the property was rented, however it is from the time the depreciating asset is held that the decline in value is calculated. At the time the depreciating asset was held, that is the time your depreciating asset was installed, the property was no longer rented or available for rent. You are therefore not entitled to a deduction for the decline in value (which would include installation costs) for the depreciating asset under Division 40 of the ITAA 1997.