Private ruling: Expenses incurred whilst a rental property was unavailable for lease
Date of advice: 19 November 2015
Published: January 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: On or after 1 June 2015

Ruling: Q1: Are you entitled to claim home insurance, interest, rates, land tax, and capital allowances in respect of a rental property during a period when the property was unavailable for rent? | A1: No

Relevant facts and circumstances: You are the owner of a rental property which has been leased for a number of years. You put the property on the market and your tenant moved out shortly later. The selling agent had exclusive rights to sell the property during a specified period. The property did not sell and you put the put the property up for lease again. The new tenants started their lease shortly later. Nobody lived in the property during the period it was for sale and the property was unavailable for lease during that period due to the exclusive rights held by the real estate agent relating to the proposed sale of the property. You have advised that it was always your intention to lease the property again if it did not sell.

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

Reasons for decision: Summary: The deductibility of expenses incurred in relation to investment properties are in the main considered under section 8-1 and Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 8-1 of the ITAA 1997 allows deductions for losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent to which they are capital, or are of a capital, private or domestic nature. Division 40 of the ITAA 1997 allows deductions for capital allowances on assets held for the purpose of deriving assessable income. The principles governing deductibility depend upon satisfying, or being able to show, that the expense has sufficient connection with the operations or activities which directly gain or produce a taxpayer's assessable income. In other words, the interest, capital allowances and other deductions must be incurred in relation to a property which is held for income-producing purposes. An existing property will be considered to be held for income-producing purposes if the property is being rented out or is available for rent. Where a property is not actually being rented it will be considered to be 'held' for the purpose of producing assessable income where the property is genuinely available for rent as evidenced by the taxpayer undertaking active and bona fide efforts to let the property at a commercial rental. This would include such activities as listing the property with a real estate agent, placing advertisements in newspapers, and not restricting availability (for example, by making the property unavailable for rent during holiday periods) to ensure the taxpayer's private use and enjoyment of the property ( Case V133 88 ATC 847). When the property is not available for rent for the full year you will need to apportion the expenses on a time basis. Your property was unavailable for rent during the relevant period as you did not have a tenant and were not actively seeking to obtain a tenant due to your efforts to sell the property during this period. This is evidenced by the Selling Agency Agreement executed with an estate agent which provided that firm with the exclusive rights to sell the property during the relevant period and the fact that no effort could be made by you to lease the property to a tenant until the end of the agreement. Accordingly no deductions will be claimable under section 8-1 or Division 40 of the Income Tax Assessment Act 1997 for expenses incurred during the period when the property was unavailable for lease. You will therefore need to apportion expenses on a time basis to allow for the period when the property was unavailable for rent.