Private ruling: Deductibility of rental property expenses
Date of advice: 2 September 2025
Published: 3 November 2025
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the holding costs (namely interest, land tax, council rates, insurance and other such holding costs (the "Holding Costs"),incurred in relation to the property deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that is limited to the amount rental income as a holiday short stay rental property during the 20XX income yearexcluding costs attributable to the period of personal use by yourselves from DDMMYY to DDMMYY? | A1: Yes, the rental expenses will be limited to the periods the property is actually rented and amount of rental income. | Q2: Are XX% of the costs of the holding expenses namely interest, land tax, council rates, insurance and other such holding costs (the "Holding Costs"), incurred in relation to the property deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the on the basis that is limited to the amount rental income as a holiday short stay rental property during the 20XX income year excluding costs attributable to the period of personal use by yourselves from DDMMYY to DDMMYY? | A2: Yes, but only for the periods the property is actually rented and to the extent of % of the interest, land tax, council rates and insurance cost and other holding costs, you are entitled for a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Relevant facts and circumstances: The property • On DDMMYY, you engaged real estate trading as Pty Ltd for a rental appraisal on the Property and they indicated an initial rental assessment of $ per week if operated on a long-term basis. • The property was previously used as a small farm, but it was not used as an operational farm in 20XX when it was advertised for sale. • The property was acquired and settled on DDMMYY for $ million. • The cash to invest was from the sale of their previous rental property. • $ million of the purchase price was financed with an interest only Bank loan. • Your intention was to purchase the property as an income producing investment property as a short-term rental as per the financial planner and real-estate agents' advice. The long-term plan for the property as an investment to derive assessable income. • Email from Person B to Person C on DDMMYY, outlining that moving forward the intention for the purchase of the Property is to offset your income against future investment income. Renovations and remedial work • Renovations and remediation work was required to be done on the property. This requirement was advised during the pre-negotiation stage of the purchase process. This included - demolition of removal of sheds contaminated with asbestos, waste and filling in of a dam that posed hazardous, property restorations, excavating and landscaping for future tenants. You engaged Studio specialists in luxury short-term rental renovations. • In MMYY, the property remediation work progressed sufficiently to be listed. Rented period • On DDMMYY, the property was listed on X for $ per night as a short-term rental. • Property was personally used by you from DDMMYY to DDMMYY and from DDMMYY to DDMMYY. This use included the gardens and orchards, no rent was paid. • On DDMMYY, the property was listed on X due to lack of bookings on X. • On DDMMYY, the property was rented. • The primary restrictions for tenants to rent the property were: No guests under the age of XX are accepted, unless they are children accompanying family members. This policy was a core part of luxury short-term rental firm's business model, as their target market is specifically affluent guests, families, ladies' retreats, couples, executive rentals and relocations and corporate bookings. Positioning as a luxury short-term rental. The listing did not ultimately generate any bookings. • Other restrictions were only applicable during the period of luxury short-term rental ' management, from MM to MMYY and there were no age restrictions other than for the applicant. The applicant must be an adult (XX years of age) to open an account to make a booking. • In MMYY, the taxpayer engaged a professional photographer for online marketing and listing. • On DDMMYY, the taxpayer took part in X to improve their operations and increase booking potential. • In MMYY, the Construction of a swimming pool begun using an additional $ loan secured against the property for all other renovations. • We asked if the rent was reduced the rental rates in the off-peak season and you provided that based on the luxury short-term rental firm's appraisal, the rental rates vary by season: • High season - $ per night base rate (X night minimum, and $ per night for Easter (X night minimum). • High shoulder season - $ per night (X night minimum). • Low season - $ per night (calculated as $ for a X-night minimum). • The peak and off-peak seasons for the property are as follows: • High season: December - February and Easter. • High shoulder season: February - April and October -December. • Low season: May -September. 20XX income year • In MMYY, a Certificate of Registration as a short-term rental accommodation was obtained as per the Council. The council has required the Certificate of registration for short term rental providers from late 20XX. • Since MMYY, the taxpayer engaged the luxury short term rental firm -for the commercial renting of the property. • The property has expansive gardens. • The property was rented for X nights and generated $ rental income. • From, a Commercial lease agreement was established between you and the Pty Ltd to lease a percentage (Y acres) of the property for a $ amount per annum. The rental proceeds will be included as income. • The short-term tenants had full access to these inclusive of their stay (the short-term rental charged covers any maintenance and overheads associated with these amenities). 20XX income year • From DDMMYY, the Pty Ltd operates as a separate standalone business. The two sources of income will have separate records to ensure accurate reporting. The payment for the lease is funded from the business activities of the Pty Ltd i.e. the sale of produce and the related products such as fresh produce, preserved produce inc. freeze dried, cordials, fruit straps - all grown on the property. • Year-to-date sales of $ have occurred between DDMMYY and DDMMYY with estimated sales for the 20XX financial year of $. • In 20XX income year, as at the date of application, the property was rented for a number of days generating a $ amount of income. The basis of this value was calculated using the method of averaging the gross margin income and the market value per acre/hectare. This is the income generating potential and the prevailing market value. • Email on DDMMYY - correspondence email with luxury short term rental firm highlighting your concern about the lack of bookings at the Property Strategies included: - Running a XX% - XX% discount promotion for last minute bookings - Reducing the bond from a $ amount to a $ amount. - In MMYY, you terminated the agreement with the luxury short term rental firm and reinstated the profile with online short term rental platforms. - As of DDMMYY, the property was actually rented for a number of nights earning a $ amount. Costs The outgoings/costs are for: a. Demolition and removal of the old sheds contaminated with asbestos and waste b. Filling in of a dam on the property as it posed a hazard for children when tenanted c. Engaging professionals for renovations and furnishings specifically for luxury short-term rental d. Renovations including the restoration of heritage elements e. Installation of a swimming pool f. Renovations and maintenance of the gardens - any changes to the gardens is capital as of DDMMYY, the maintenance of the gardens falls under the company as they are now using the gardens. The materials used were mainly timber, paint, bathroom tiles and fit out, land and earthworks bringing in soil and rock to lift up and level out the land between shed and house and shed and swimming pool. Occupancy costs The occupancy costs are: a. Interest b. Land tax c. Council rates d. Insurance Rental expenses The council rates and other holding costs will be paid for by you as the owners of the Property, while the maintenance, utilities and water costs relating to the gardens will be borne by the Pty Ltd as the commercial tenants. Property is not connected to the main water supply; instead, water is sourced from separate tanks on the Property. Tank 1 is connected to the house, while Tank 2 services the gardens. When necessary, the water tanks are refilled using a water cartage service. The water costs for the Property are managed separately, as there is no shared water supply between the house and gardens. Each party is responsible for the costs associated with their respective tank, with refills arranged as needed through a water cartage service. You do not have insurance, and you will not receive any reimbursements for the expenses

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA) section 8-1


Does Part IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar . | Summary: You can deduct the costs in relation to the property under section 8-1 of the ITAA 1997, due to the restrictions placed on the renting the property for a period in the financial year, you have made the property an undesirable place to holiday for reasons such as the prices are too high in off seasons and restrictions such as, you do not allow children or pets. The initial intention is to offset income. This indicates that the property is not genuinely available for rent for part of the year. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature. | We do not consider the rental property was genuinely available for rent for the whole period that the property is advertised to be rented. Therefore, the income and expenses will be deducible based on the number of days the property had tenants in the property. | You incurred expenses in relation to the Property during the income years covered by this ruling and we have considered your eligibility to claim a deduction in relation to those expenses. | Detailed reasoning: Under section 8-1 of the ITAA 1997 an individual can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing their assessable income. However, a loss or outgoing cannot be deducted to the extent that it is of a capital, private or domestic nature. | You cannot claim a deduction if the expenses are incurred in producing exempt income or a provision of the tax law prevents a taxpayer from claiming a deduction. | Connection with the income of the taxpayer: To be deductible under section 8-1 of the ITAA 1997, a loss or outgoing must have a sufficient connection with the derivation of the taxpayer's assessable income. | The expense must be incurred in gaining or producing assessable income. | The sufficiency of the connection is determined on the facts of the case. The purpose of the purchase of the rental property includes to derive income by generating profits or capital growth as an investment property, for private or personal use. | Incurred expenses: To be deductible, the expense must have been incurred by a taxpayer as outlined in Taxation Ruling TR 97/7 Income Tax: section 8-1 meaning of 'incurred'- timing of deductions. Paragraph 2 states that - this guidance to all taxpayers who claim a loss or outgoing under section 8-1, whether or not the taxpayer accounts for income on a cash receipt or earning basis. The ruling further states that for non-business taxpayers use a cash received and cash paid basis for taxation purpose ... | The High Court majority in Commissioner of Taxation v Payne [2001] HCA 3 said it is well established that these words are to be understood as meaning incurred 'in the course of' gaining or producing assessable income, and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income. | The majority further stated that the meaning of 'in the course of' gaining or producing income was amplified in Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15 where it was held that: | ... to come within the initial part of [section 8-1] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income, or if none be produced, would be expected to produce assessable income ... | Application to your circumstances: In your case, all the outgoing costs for the property for the period that the property is actually rented out are the costs incurred. This should be appropriately apportioned by excluding the period of the private use of the property. | Considering the high value property and the derived rental income, the intention does not support the intention to generate profit. The principle of having an investment property even as a negative geared property is that in the long term the earning activities are supposed to generate profits. | In considering the alternative purpose of using the property for personal use in MM to MM, the fair application should be based on having the rental income and expenses being limited to the amount of rental income received. | Additionally, the email on DDMMYY indicated the intention was to offset income. | For the 20XX, the taxpayer needs to be clarified between the individual liability and the Pty Ltd to ensure there is no double counting or deduction of the same expenses. | The ATO Rental Properties Guide 2025 (NAT 1729-06.2025) specifically outlines the costs that are not deductible including but not limited to: | • Expenses that you do not incur, such as water or electricity usage charges bourn by the tenants or | • Where the property (including a holiday home) was not genuinely available for rent ... | Property genuinely available for rent: Where the property is held for the purpose of producing assessable income, a taxpayer is entitled to deductions for expenses incurred, providing the property is genuinely available for rent. | The first determination is confirmation that a rental property is genuinely available for rent. This is evidenced by having tenants in the property or there is a genuine effort to broadly advertise to a broad exposure to possible tenants and that there are no restricting conditions for tenants that are likely able to rent the property. | In addition, there must be evidence that the owner of the property is actively and continuing in the efforts to rent the property. Ordinarily, this is the property being advertised to the public at appropriate market rates and tenants are likely to rent it. | Having regard to all the specific circumstances, tenants are reasonable likely to rent it. | The absence of these factors generally indicates the owner does not have a genuine intention to make income from the property and may have other purposes. | There are conditions that indicate a property is not available for rent including but not limited to: | • The property is only advertised outside annual holiday periods when the likelihood of it being tenanted out is very low. | • A taxpayer places unreasonable or stringent conditions on renting out the property such as requiring prospective tenants to only able to apply based on conditions such as no children or no pets. | • Setting the rent above the rate of comparable properties in the area. | These and having the property reserved for personal use is generally an indication that the property is not genuinely available for rent. In your case, the limitation starts in MMYY. | Another guideline when considering the purpose of the expenditure claimed as a deduction is to determine whether the property was genuinely available for rent. In Inglis v Federal Commissioner of Taxation (1987) 87 ATC 2037 at (71)-(72), Deputy President Todd said: | ... While it is true that the property was vacant and theoretically available at all times, it cannot be said to have been truly available for letting unless some perceptible effort was being made to obtain tenants in respect of those times, or at least some step taken to draw its availability to the attention of the public, the classic method of so doing being the placing of it with an agent. The sufficiency of the steps taken is a question of fact to be decided in each case, but in this case, considering the irregular advertising and the restriction of the opportunity of renting to Canberrans, there has in my view been insufficient done for it to be able to be said that the property was available for letting for periods adequate to support the claims made ... | The are specific examples provided to outline the application to the law that rental expenses are only deductible to the extent that they are incurred for the purpose of producing rental income. Example on QC 101711 on Rental expenses | Australian Taxation Office outlines the deduction for a proportion of their expenses based on the period the property was actually rented out: | "Example 8: private use by owners during key periods with little or no demand for property at other times | Person A and Person B have 2 school aged children and own a holiday house near the beach. The house is located in an area that is popular with summer holiday makers but is only accessible by four-wheel drive vehicle. | During the year Person A and Person B advertise the property for rent through a local real estate agent. However, Person A and Person B advise the agent that during each school holiday period the property is not to be rented out. They want to reserve the property for their own use. | While there would be demand for the property during the summer holiday period, there is no demand outside this period because of the small number of holiday makers and the location and limited access to the property. | The house is not rented out at all during the income year. | In Person A and Person B's circumstances, they can't claim any deductions for the property. They did not have a genuine intention to make income from the property. It was essentially for private use. | If in the circumstances Person A and Person B happened to rent out the property for a period, they can claim a deduction for a proportion of their expenses based on the period the property was actually rented out. For example, if the house was rented out for 2 weeks, they could claim a deduction for 2 out of 52 weeks for their expenses. | Person A and Person B need to keep records of their expenses. If they make a capital gain when they sell the property, the proportion of expenses (such as interest, insurance, maintenance costs and council rates) they could not claim a deduction for are taken into account in working out their capital gain." | When the property is not genuinely available, the expenses are deductible based on the period the property is tenanted not advertised for rent. Having regard to all circumstances, tenants must be reasonably likely to rent the property. | Taxation Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases outline the Commissioners position in relation to a property that is used for private and income producing purposes throughout the income year. Paragraphs 23 and 24 outlines that in Case No. P116, 82 ATC 590: Case No 21/1982 (1982) 82 ATC 590 , a property was let for 16 days during the year of income, occupied by the owners for 107 and vacant for the balance of the year. Taxation Board of Review No. 1 apportioned the losses and outgoings attributable to the property on a time basis and allowed a deduction for the proportion that the property was let, i.e. 4.4%. | The approach the Board has taken to apportion the income tax deduction allowable on a time basis should be followed in comparable cases. A period of time where the property was available for rent, but not actually rented, should only be taken into consideration where it can be established that there are active and bona fide attempts to let the property during the relevant period. | To verify this, the price charged to rent the property is compared to the market prices for a comparative property. For rental properties, these vary for off peak and in season prices. There is need to consider that the comparative advertised properties are also genuinely available for rent. This may be confirmed by having a larger sample size of the properties to get the average prices. | Taxation Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases further states in paragraph 25 states that: A question which may arise in cases coming under this heading is whether the apportionment of losses and outgoings attributable to a property should take into account the periods during which the property was not only let at a commercial renta l but also available for letting at a commercial rental. The question is, of course, one for decision in individual cases. Nevertheless, a period of time during which a property was available for letting should only be taken into account where it is established that active and bona fide efforts to let the property at a commercial rental were made during the relevant period. | Paragraphs 4 of the TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings (TR 95/33) reminds us that the mere fact that a tax loss was made in a particular year warrants further consideration, but that outcome is not in itself the basis for any decision. Expenses don't have to relate to assessable income of the same year. | Paragraphs 5 of the TR 95/33 outlines that after weighting all the circumstances, including the direct and indirect objectives and advantages, in a common-sense and practical manner, it can be concluded that the expenditure is genuinely, and not colourable, used in an assessable income producing activity, a deduction is allowable for the loss or outgoing. | Paragraph 6 of the TR 95/33 asks us to determine if there are (or maybe) other reasons for incurring the expenses and if those other reasons are private or don't generate assessable income then deductions should be reduced. | This is the case if the conclusion is that there is a disproportion between the outgoing and the relevant assessable income. | Paragraph 14 of the TR 95/33 outlines the apportionment of losses and outgoings using the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both 'fair and reasonable' in all the circumstances (Ronpibon Tin (1949) 78 CLR 47 at 59; 8 ATD 431 at 437). | Paragraphs 16 and 43 to 46 of the TR 95/33 specifically discusses negatively geared investment properties at. The limitation of deductions doesn't apply to the traditional form of negatively geared investment property for the reason expressed in paragraph 46 being that the expected future income will make it positive overall. | In the Fletcher cases law, was a first limb situation, it was 'fair and reasonable' to limit the amount of the deduction to the amount of the assessable income actually received in that year. | Additionally, the ATO QC - 45076 - Holiday Homes outlines with specific examples of when a taxpayer cannot claim a deduction for expenses that relate to: | • periods when the property is not genuinely available for rent | • periods when the property is used for a private purpose | • the part of the property that isn't rented out. | This would include the cost of cleaning your holiday home after you, your family or friends have used the property for a holiday or a repair for damage you have caused while staying there. | Holiday home - not genuinely available for rent: Expenses may be deductible for periods when the property is not rented out if the property is genuinely available for rent. | Factors that may indicate a property isn't genuinely available for rent in this case include: • it's advertised in ways that limit its exposure to potential tenants - for example, the property is only advertised outside annual holiday periods when the likelihood of it being rented out is very low | • you place unreasonable or stringent conditions on renting out the property that restrict the likelihood of renting out the property, such as | - placing a combination of restrictions on renting out the property - for example, requiring prospective tenants to give references for short holiday stays and conditions like 'no children' and 'no pets'. | These factors generally indicate the owner doesn't have a genuine intention to earn rental income from the property and may have other purposes, such as using it or reserving it for private use. | Example 1: rental property with unreasonable conditions | Person C and Person D are retired and own a holiday home where they stay periodically. They hire a real estate agent to advertise the property for short-term holiday rental but insist on personally approving all tenants. They require prospective tenants to provide references and don't allow tenants with children or pets. | Throughout the year, despite receiving several inquiries, Person C and Person D refuse to rent out the property. Their strict conditions and refusal to accept tenants indicate their intention isn't to earn rental income, but to keep the property for their own use. As a result, Person C and Person D can't claim any deductions for the property. | Person C and Person D need to keep records of their expenses. If they make a capital gain when they sell the property, their property expenses are taken into account to work out their capital gain. | Example 2: private use by owners during key periods | Person A and Person B have 2 school-aged children and own a holiday house near the beach. The house is in a popular summer holiday area but is only accessible by four-wheel drive vehicles. | During the year, Person A and Person B advertise the property for rent through a local real estate agent. However, they advise the agent not to rent it out during school holiday periods, as they want to use it themselves. | While there is demand for the property during summer holidays, there is no demand outside this period because of its location, limited accessibility, and the small number of holidaymakers during off-peak seasons. As a result, the house isn't rented out at all during the income year. | In Person A and Person B's circumstances, they can't claim any deductions for the property. They don't have a genuine intention to earn rental income from the property. It is essentially for private use. | If Person A and Person B happen to rent out the property for a period, they can claim a deduction for a proportion of their expenses based on the period the property is actually rented out. For example, if the house is rented out for 2 weeks, they can claim a deduction for their expenses for 2 weeks out of the 52 weeks in the year. Person A and Person B would need to keep records of these expenses. | Application to your circumstances: In your case, the property was genuinely available for rent when the property was actually rented out. Before the apportionment of the expenses based on the number of days the property was rented, the specific deductibility must be determined based on the type of expense. | As indicated above, the absence of specific factors generally indicates the owner does not have genuine intention to make income from the property and may have other purposes - such as using it or reserving it for private use. | In your case, we have concluded that the property was not genuinely available for rent during the period based on the following considerations: | • The property has been made unavailable for rent during the peak season of December to January every year. | • You have limitations such as no children and no pets for the prospective tenants. | • The rate of $ per night for short-term rental is not considered as a price that tenants are reasonable likely to rent it. | • There is no evidence of significant price drop to encourage more tenants to rent the property. | • Based on the level of investment with an initial investment of $ million, the interest expense and other costs are significant. Unproportionate to the intention of this scheme being income producing. | In determining whether an expense is deductible, it is necessary to establish a direct connection between holding the property to generate rental income and the expenses associated with holding the property. Based on the considerations above, the property was not genuinely available for rent for the whole period of holding the property as it cannot be considered to have been held to generate income. | The property deductibility of expenses is also based on the type of the rental expense. | Different types of rental expenses: In determining whether an expense is deductible for income tax purposes it is necessary to establish a direct connection between holding a property to generate rental income and the expenses associated with holding that property. As indicated, you cannot deduct an expense under section 8-1 of the ITAA 1997 if it is of a capital, private or domestic nature. | The second determination is when the expense is incurred and the type of expenses. | Acquisition and disposal costs: You cannot claim a deduction for the costs of acquiring or disposing a rental property such as: | • fees on bank guarantee in lieu of deposits | • advertising expenses to find tenants | • fees of buyer's agents you engage to find your suitable rental property to purchase, including where the agent recommends a property manager free of charge as a n optional supplementary service. | • Stamp duty on the transfer of the property. | All the above costs are capital costs added to the cost base of the property to be included on the disposal of the property. | There are different types of rental expenses with their respective specific legislation that allows a taxpayer to have a deduction. | A. There are expenses that are deductible in the year they are incurred under sections 8-1 ITAA 1997. To be deductible, there must be a sufficient connection that is determined on the facts of the case. Interest payments are generally deductible on money borrowed to purchase, construct or renovate a business asset or an income producing. | Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. | The character interest on a loan is generally ascertained by reference to the purpose of the loan ( Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613 (Fletcher's Case)) and the use to which the loan is put ( Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153 (Munro's Case)). Therefore, if a loan is used to purchase property from which income is to be derived, the interest paid on the loan is generally deductible. | The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. | Accordingly, it follows that if a loan is used for business or investment purposes from which income is to be derived, the interest expense incurred on the loan will be deductible. | Other costs are that are deductable rental expenses based on being incurred for income producing purpose are: | • Real estate agent fees for rental purposes | • Advertising for tenants | These expenses are considered revenue in nature because they are directly linked to the revenue income producing activity. | Application to your circumstances: In your case you obtained the bank loans for investment purpose and the interest is deductible for the period the property is tenanted. | Additionally, the council rates, land tax, insurance, utilities, water charges and the other occupancy expenses will be deductible in the year you incurred the cost. The apportionment is based on the days the property was tenanted. | The most appropriate legislation is used in determining which law applies to what expense, for instance gardening and landscaping is a general expense but if the costs are significant this can be a capital costs and accounted for under sections that do not provide immediate deduction of the whole amount. The different legislation is outlined below. | Section 25-10 of the Income Tax Assessment Act 1997 allows a deduction for the cost of repairs to premises used for income producing purposes. Expenditure incurred for repairs is not deductible to the extent that it is of a capital nature (subsection 25-10(3)). Every property will have specific circumstances such as the building original construction date, the current owners purchase date or the purpose for the use of the property in the preceding years. | Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction. | Paragraph 4 specifically states that the expression 'initial repair' means the remedying or making good of defects in, damage to, or deterioration of property as long as the restoration is of the entirety and does not change the character of the property. | The defect, damage or deterioration: | a. existing when the property was acquired from another person (whether by purchase, lease or licence); and | b. not arising from the operations of the taxpayer who incurs the repair expenditure. | Paragraph 7 of the TR 97/23 states that - Section 8-10 of the ITAA 1997 provides a rule against double deductions. If expenditure on repairs is potentially deductible under both sections 25-10 and 8-1, section 8-10 provides that you can deduct only under the provision that is most appropriate. Which provision is the most appropriate is an objective question. In our view, if both sections 25-10 and 8-1 allow you to deduct the same amount, section 25-10, being the provision that deals specifically with repair expenditure, is the most appropriate provision. | The word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repairs (being defects, damage or deterioration in a mechanical and contemplates the continued existence of the property (paragraph 13 of TR 97/23). | It is acknowledged in TR 97/23 at paragraph 16 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. | Repairs and maintenance often go together, in that repairs will frequently include maintenance work. R 97/23, if work is in anticipation of, or to prevent, damage or deterioration, it is considered maintenance. And some kinds of maintenance work are 'repairs' in terms of section 25-10, for example, painting premises to rectify existing deterioration and to prevent further deterioration | The examples of repairs and maintenance are items of replacing something that is worn out, damaged or broken because of renting out the property: | • Replacing some guttering damaged in a storm | • Plumber costs to fix a leaking tap | • Repainting a portion of the interior walls | A repair is simply to replace or correct something that has been worn-out or delipidated. | Repair is distinct from improvement: The meaning of 'repair' or 'repairs' is considered in paragraphs 12 to 30 of this Ruling. In the case of a 'repair', broadly speaking, 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 - usually in some existing function. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life. | To distinguish between a 'repair' and an 'improvement' to property, one needs to consider the effect that the work done on the property has on its efficiency of function. This is the determinative test. | If the work done on the property extends from being a repair and it goes beyond repairs by checking if: | a. it changes the character of the property | b. it does more than restores its efficiency of function | TR 97/23 'renewal, replacement or reconstruction of the entirety (i.e., the whole or substantially the whole) of a thing or structure is an improvement rather than a deductible repair'. | Further apportionment of the cost is required if the activities are both a repair and an improvement, a capital cost. The costs incurred will need to be apportioned between capital and repairs under subsection 25-10(3) of the ITAA 1997. The materials used are considered to compare if similar material was used or an upgrade of the materials was used. | You cannot claim expenses of a capital nature or private nature (although you may be able to claim decline in value deductions or capital works deductions for certain capital expenditure or include certain capital costs in the cost base of the property for CGT purposes). | Initial repairs: Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition of property are initial costs. Initial repairs are part of the acquisition cost and included in the cost base of the property for CGT purposes. | The demolition and removal of the old poultry sheds contaminated with asbestos and animal waste and the filling in of a dam on the property as it posed a hazard for children when tenanted are considered as initial repairs to remedy damage, deterioration or defects that existed when you purchased the property. Therefore, these expenses are capital in nature and are not deductible under section 25-10 of the ITAA 1997. | The initial repair expenses are not considered capital works expenditure and not deductible under Division 43 of the ITAA 1997. However, the expenses may be included in the fourth element of the cost base of the Property | Examples of initial costs are: | • Restumping of a property grounds. | • Remedy of defect, damage or deterioration of a property including the environmental damage. | • Fixing floorboards that had damage when the property was bought. | Application to your circumstances: In your case, regarding the property restorations, renovations and furnishings expenses, as per the response to further information email on the DDMMYY, you have advised that the materials used were mainly timber, paint, bathroom tiles. | The costs are repairs if they restored the property without changing the function even if it is an incidental degree of improvement. However, all the repairs were done to get the property ready to be rented then it falls under initial repairs thus being capital in nature and not deductible. Your costs were part of the remedial work required before you were able to rent the property out. The demolition and removal of poultry sheds contaminated with asbestos and animal waste. This is an initial cost to remedy the defect of causing harmful and poisonous effects for the future tenants. | The foundational work conducted as repairs of the property is deductible as an initial repair pursuant to section 25-10 of the ITAA 1997. This is distinguished based on when repairs are done and what exactly was done makes this an initial repair. This deductibility is not under section 8-1 of the ITAA 1997 but as a capital works deduction. | Capital costs: Expenditure is capital in nature where it is made with a view to bring into existence an asset or advantage that is of enduring benefit. Capital expenditure is characterised by the fact that it is usually a one-off payment and establishes, replaces or enlarges the income producing asset. | The following are examples of expenses which are capital or of a capital nature: | • replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator) | • improvements, renovations, extensions and alterations, and | • initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property. | You may be able to claim decline in value deductions or capital works deductions for certain capital expenditure or include certain capital costs in the cost base of the property for CGT purposes. | Application to your circumstances: In your case, part of your initial repairs included filling in a dam on the property that posed a hazard for future tenants and excavating were done to bring the property to the initial state. Remedying the acquired property. | As per the response to further information email on the DDMMYY, you have advised that the materials used were fit out, land and earthworks bringing in soil and rock to lift up and level out the land between shed and house and shed and swimming pool. | Divisions 40 and 43 of the ITAA 1997 expenses are deductible as capital works or as a depreciating asset over a number of income years. | Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset that you hold. A depreciating asset is an asset that can reasonably be expected to decline in value over the time it is used. (section 40-30 of ITAA 1997). These assets are items that can be described as plant, which do not form part of the premises. | These items are usually: separately identifiable; not likely to be permanent and expected to be replaced within a relatively short period and not part of the structure. | Examples of assets that deductions for decline in value can be applied to include: | • appliances like a washing machine or fridge and furniture. | Division 43 of the ITAA 1997 provides a deduction for capital works. Capital assets are structural improvements, alterations and extensions to the property. The rate of deduction for capital works for a residential property is 2.5% of construction expenditure over 40 years. | Deductions based on construction expenditure apply to capital works such as: | • a building or an extension, for example, adding a room, garage, patio or pergola | • alterations, such as removing or adding an internal wall | • structural improvements to the property - for example, adding a gazebo, carport, sealed driveway, retaining wall or fence. | Application to your circumstances: In your case, the installation of a swimming pool is a capital work. If the other renovations consisted of the capital works outlined above, they are only deductible under Division 43 of the ITAA 1997. The cost will be deductible over the effective life of the pool. All other running costs will depend on the use. Access and use of the pool remains included as a part of the short-term rental experience and any associated costs are expected to be covered in the rental charged to the short-term rental tenants. | The work conducted at the property may be considered to be capital works and therefore deductible as capital works pursuant to Division 43 of the ITAA 1997. An exception to the rule includes the actual cost of the expense. | Immediate deduction for depreciating assets costing $300 or less: The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it to produce assessable income, including rental income, during the income year in which the deduction is available. | The immediate deduction is available if all of the following tests are met in relation to the asset: | • it cost $300 or less and a taxpayer used it mainly for the purpose of producing assessable income that was not income from carrying on a business (for example, rental income where your rental activities did not amount to the carrying on of a business of letting rental properties) | • it was not part of a set of assets costing more than $300 that you started to hold in the income year, and | • it was not one of a number of identical, or substantially identical, assets that you started to hold in the income year that together cost more than $300. | Other costs include bed linen, furniture, crockery & cutlery that may be required when the rental property is being rented out with furniture. | Application to your circumstances: In your case, you will need to identify the costs that are under $300, those expenses will also be deductible after apportioned in the year incurred. | Question 2: Are % of the costs of the holding expenses namely interest, land tax, council rates, insurance and other such holding costs (the "Holding Costs"),incurred in relation to the Property deductible under section 8-1 of the Income Tax Assessment Ac 1997 (ITAA 1997) on the basis that is limited to the amount of rental income as a holiday short stay rental property during the 20XX income year excluding costs attributable to the period of personal use by yourselves from DDMMYY to DDMMYY? | Answer 2: Yes, but only for the periods the property is actually rented and to the extent of XX % of the interest, land tax, council rates and insurance cost and other holding costs, you are entitled for a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). | Other costs - not deductible: Under section 8-1 of the ITAA 1997 an individual can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing their assessable income. However, you cannot deduct a loss or outgoing if it is a loss or outgoing of a private or domestic nature, or a specific provision prevents you from deducting it (8-1(2)(b) ITAA 1997). | Therefore, other costs incurred by the taxpayer that are not deductible. Characterisation of an expense as private typically supports a conclusion that the expense does not have a sufficiently close connection to the earning of assessable income. | Paragraph 2 of the Taxation Ruling TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings (TR 95/33) outlines what is considered necessarily incurred. To be considered necessarily incurred for the purpose of determining whether an outgoing is deductible for a business, the outgoing must have essential character to the business and have sufficient connection with the operations or activities which more directly gain or produce your assessable income. | Other considerations in addition to incurring the cost is the timing of the expense. For instance, the cost of engaging a professional photographer to capture images of the property for use in marketing and online listings was incurred in the 2023 financial year. The expense is deductible in the year that it is incurred. | Application to your circumstances: In your case, on DDMMYY, Person B took part in the DDMMYY Training' to improve their operations and increase booking potential. This is an expense that is not directly related to income producing because the taxpayers are not themselves in the business as the property managers. | You cannot claim the costs of the professional photographer incurred for prospective tenants; these expenses are not necessarily incurred for the purpose of producing assessable income. The marketing cost is incurred before the nexus of income producing is created. | The personal use of the property from DDMMYY to DDMMYY is private in nature and all the expenses for the period are not deductible. | If you use the rental property and items within the property at any time for personal use, you will need to apportion the expenses incurred between the tenant use and personal use (where you are not earning assessable income). This will also include expenses incurred at other questions in this ruling where necessary. | Expenses prior to property being genuinely available for rent: You can claim expenditure such as interest on loans, local council, water and sewerage rates, land taxes and emergency service levies you incurred during renovations to a property you intend to rent out. However, you can't claim deductions from the time your intention changes, for example, if you decide to use the property for private purposes. | After reviewing the information provided with this ruling and the facts of your situation it is viewed that you are entitled to claim a deduction based on the actual days rented by tenants.