Private ruling: Property deductions
Date of advice: 14 October 2015
Published: October 2015
Ruling period: Year ended 30 June 20ZZ.
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you entitled to a deduction for the following: • painting the interior of the property? • repairs to deck? • land tax, council rates and building insurance? • replanting the front garden? | A1: No | Q2: Are you entitled to a deduction for the decline in value of carpets and window coverings? | A2: No | Q3: Are you entitled to a capital works deduction for the cost of removing the broken concrete path from the gate to the house and replacing with pavers over a concrete base? | A3: No

Relevant facts and circumstances: You have previously received a favourable private ruling on the above questions for the years ended 30 June 20XX and 20YY. At that time, you expected to have the property available for rent by January 20YY. However you were unable to achieve this aim and you have advised that the property will not be available for rent until June 20ZZ. Accordingly you have asked that the ruling be extended to cover the year ended 30 June 20ZZ. The property was first rented out by you in October 20VV. When the tenant moved out in July 20WW, you commenced doing work on the property for the stated purpose of gaining further rental income. This work included: • Replacing guttering and downpipes, • Painting inside and outside • Replacing carpets • Replacing window coverings • Repairs to the deck • Removing the broken concrete path from the gate to the house and replacing with pavers over a concrete base. • Replanting the front garden You have also incurred ongoing costs for land tax, council rates and building insurance. No rental income has been returned by you since the year ended 30 June 20WW. To date you have painted the outside of the house and replaced the guttering and downpipes. You intend to complete all the required work yourself.

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 - section 43-10 | Income Tax Assessment Act 1997 - section 43-140

Reasons for decision: Summary: Maintenance and holding costs, such as rates, insurance and land taxes incurred in connection with a property that is available for lease are deductible under section 8-1 of the ITAA 1997 when incurred in deriving the assessable income of the taxpayer. Repairs to a rental property are deductible under section 25-10 of the ITAA 1997 Taxation Ruling 2004/4 provides guidance where the property does not derive any assessable income during a year of income. Although this ruling is primarily concerned with interest expenses incurred in relation to a property, it is considered that the views expressed would have equal application to your situation. The ruling states that it is not necessary that the expenditure in question should produce assessable income however if the taxpayer keeps the costs on foot for reasons unassociated with the prior income earning activities, the nexus between the outgoing and the relevant income earning activity will be broken. In your case the length of time that has elapsed since the property last generated rental income is considerable and in our view has passed the point where the ongoing repairs, maintenance and holding costs incurred can be said to have been incurred in deriving assessable income. It is therefore considered that the maintenance and holding costs have not been incurred in deriving your assessable income in the 20YY-ZZ income year. Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of capital assets, such as carpets and window coverings, where those assets are used for income producing purposes. In your case it is considered that as your property will not be used for rental purposes until after the 20YY-ZZ year of income and has not been available for rent since July 20WW, it has passed the point where the decline in value of capital assets can be said to have been incurred in deriving assessable income. Accordingly it is not considered that the decline in value of capital assets has been incurred in deriving your assessable income in the 20YY-ZZ income year. Section 43-10 of the ITAA 1997 allows a deduction for capital works if: • the capital works have a construction expenditure area; and • there is a pool of construction expenditure for that area; and • you use the area in the way set out in the table at section 43-140 of the ITAA 1997. The table at section 43-140 of the ITAA 1997 allows a deduction for capital works that you use for the purpose of producing assessable income. In your case it is considered that as your property will not be used for an income producing purpose until after the 20YY-ZZ year of income and has not generated any rental income since the 20UU-VV income year, it has passed the point where the deduction sought for the decline in value of capital assets can be said to be attributable to the derivation of your assessable income. It therefore fails the test prescribed at section 43-10 of the ITAA 1997 for deductibility as you have not used the property for income producing purposes during the year of income. Accordingly it is not considered that you are entitled to claim a deduction for the cost of the capital works in the 20YY-ZZ income year.