Private ruling: Expenses - investment in a rental property
Published: June 2014
Ruling period: 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the cost of interest incurred on a loan taken out to purchase the property which will be leased to beneficiaries as their private residence? | A1: Yes. | Q2: Are you entitled to a deduction for the cost of allowable rates, land taxes, and repairs and maintenance incurred in relation to a rental property which will be leased to beneficiaries as their private residence? | A2: Yes. | Q3: Are you entitled to a deduction for the cost of an allowable decline in value of depreciating assets incurred in relation to a rental property which will be leased to beneficiaries as their private residence? | A3: Yes. | Q4: Are you entitled to a deduction for the cost of allowable capital works (special building write off) incurred in relation to a rental property which will be leased to beneficiaries as their private residence? | A4: Yes | Q5: Can losses incurred from the rental of a property be offset against other income? | A5: Yes.

Relevant facts and circumstances: You intend to take out a loan in your capacity as trustee of the Trust (discretionary investment trust) (the Trust). The proceeds of this loan will be used to purchase a residential rental property. It is intended that beneficiaries 'A' and 'B' (and their children) will be the tenants of the residential property under a long term lease. The expected rental to be charged will be at market rate and will be determined by an independent qualified valuer. It is expected that beneficiary 'B' will be the only beneficiary to receive a distribution from the trust. You expect that rates, land tax, repairs and maintenance will be incurred in relation to the rental property in your capacity as trustee of the Trust. You expect that you will incur a decline in value of depreciating assets in relation to your rental property in your capacity as a trustee of the Trust. You expect that you will incur the cost of capital works (special building write off) in relation to your rental property in your capacity as a trustee of the Trust. You may incur some losses from the renting of this property. You expect you will receive trust distributions, dividends and/or business income from other sources but this income is not certain.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 36

Reasons for decision: Summary: Under section 8-1 of Income Tax Assessment Act 1997 (ITAA 1997), expenses are generally deductible if there is a sufficient connection between the expense and the gaining or producing of assessable income. This is the case provided that the expenditure is not of a capital, private or domestic nature and includes interest on a loan, rates and land taxes connected with an income producing rental property. In your case, you intend to take out a loan to purchase a rental property which will be occupied by the beneficiaries of the Trust. They will be charged at market rate which will be independently set. This property is expected to incur rates and land tax. Accordingly, it is considered that the bank interest, the rates and the land tax will be incurred in connection with the purchase of a rental property which is expected to produce assessable income. The expenditure is not capital in nature and as it is you (the company) who will be taking out the loan, and it is the beneficiaries who will be the tenants of the property, the expenditure will not be private or domestic in nature. Section 25-10 of the ITAA 1997 is concerned with repairs and maintenance. Whilst such expenses may be generally deductible under section 8-1 of the ITAA 1997, it is section 25-10 of the ITAA 1997 that specifies the exact nature of the allowable expense. For the cost of repairs to be deductible, they must relate directly the wear and tear of the rental property, or other damage that occurs as a result of renting out the property. The replacement of an entire structure, improvements, renovations, extensions and alterations, and initial repairs are all considered to be capital in nature and so are not allowable as a deduction. In your case, the cost of allowable repairs and maintenance will be deductible as the expenses will be incurred in connection with an income producing rental property. Division 40 of the ITAA 1997 provides a deduction for the decline in value of depreciating assets if those assets were held for a tax purpose such as producing assessable income. Division 40 of the ITAA 1997 generally allows a deduction for the cost of a depreciating asset based on its effective life. Relevantly for residential rental properties, an immediate deduction for certain non-business depreciating assets costing $300 or less or a deduction under the low-value pools provisions may be available if Division 40 applies. Some items found in a rental property are regarded as part of the setting for the rent producing activity and are not treated a separate asset in their own right and so cannot be included in any claim for a decline in value. In your case, the cost of an allowable decline in the value of depreciating assets in relation to your rental property will be deductible as the assets have been held for the purposes of producing assessable income. Division 43 of the ITAA 1997 allows a deduction for certain kinds of construction expenditure (capital works deductions). An allowable deduction is dependent on the age of the building (for example, such a deduction is not available if the construction of the building started before 22 August 1979), the intended use of the building and the type of construction expenditure. You can only claim deductions for the period during the year that the property is rented or is available for rent. In your case, the cost of an allowable capital work deduction in relation to your rental property will be deductible during the year(s) that the property is rented. Allowable losses incurred from a particular assessable source of income form part of the calculation of the total assessable income of a taxpayer. In other words, any such losses can be deducted from the total of other assessable income to come up with a final total of assessable income. Losses not totally extinguished in this way may be carried forward and offset against the income of the taxpayer in future income years. In your case, any allowable losses that arise as a result of you renting out the property can be offset against your income from other sources.