Private ruling: Rental property remediation work
Date of advice: 26 June 2019
Published: August 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you eligible to claim an immediate repair deduction for the following work performed at your rental property? · mould and water ingress investigations · concreting · roofing and guttering · rendering · painting · windows and doors · removal of mould contaminated contents | A1: Yes Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises held for income producing purposes, provided the repairs are not of a capital nature. Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10 of the ITAA 1997. | Q2: Are you eligible to claim a capital works deduction for the following expenditure incurred in relation to your rental property? · waterproofing · plumbing - installation of drainage system · electrical works - installation of power outlets for a submersible pump · mould decontamination works · brickwork, including lintel replacement, external cavity flashing and damp proof course and joint openings · structural engineers and works undertaken for subfloor structure and underpinning · installation of new internal tanking/damp proofing | A2: Yes A deduction is available under Division 43 of the ITAA 1997 for construction expenditure for certain capital works. Section 43-20 of the ITAA 1997 recognises three categories of capital works: · buildings or extensions, alterations or improvements to buildings; · structural improvements or extensions, alterations or improvements to structural improvements; and · environmental protection earthworks. | Q3: Are you eligible to apportion deductions between repairs and capital works for the following non-specific expenditure incurred in relation to the overall remedial works undertaken for the rental property? · project manager fees · council fees and required safety items · general inclusions and site setup as according to the construction contract | A3: Yes. We consider it reasonable that a portion of these expenses related directly to the repairs carried out simultaneously with the capital works. Accordingly you should make a reasonable apportionment of these costs between repairs and capital works construction expenditure. | Q4: Are you eligible to claim a deduction for environmental protection activities under section 40-755 of the ITAA 1997 for the following expenses incurred? · asbestos contaminated soil · mould contaminated furniture | A4: Yes Section 40-755 of the ITAA 1997 allows a deduction for expenditure you incur for the sole or dominant purpose of carrying on eligible environmental protection activities. One class of environmental protection activities is preventing pollution of or from the site of your earning activity (subparagraph 40-755(2)(a)(ii) of the ITAA 1997). The above asbestos and mould remediation work falls within this category and you can claim a deduction for these expenses. | Q5: Are you eligible to claim a deduction for the legal expenses incurred in relation to the rental property? | A5: Yes In determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. In your case the itemised legal scope of work lists the work included resolving outstanding disputes with the lessee arising from the lease, negotiating a resolution to the issues with the tenants including but not limited to: the requirements under the lease for abatement of rent during remedial works. This representation relates to the rental income and so is related sufficiently to the earning of your assessable income and is therefore deductible under section 8-1 of the ITAA 1997.


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 40-755 | Income Tax Assessment Act 1997 Section 43-20


Relevant facts: You undertook extensive remedial works on a rental property for most of the relevant income year. You have been a part owner of the property for more than X years. | You ran a business from the commercial area of the property, after which it was leased to arm's length parties who continued to businesses. | The commercial property has been vacant since XXXX, but has been actively marketed since XXXX. | You have an agency agreement with a leasing agent, for a period commencing in XXXX, to market the property for lease. | The property and continues to be a rental property to date. The bulk of the property is a commercial office, with some residential units. The commercial property, for a number of years, had suffered from rising damp and water ingress. Various works had been performed over the years to rectify the issue. However, once the commercial tenant vacated and brought legal action against the taxpayer, builders and other professionals were engaged to assess the works required in order to remedy the current damage and prevent future damage. During the relevant year, a significant amount was incurred on the works required and legal costs. Whilst the works were being carried out, one of the residential units was tenanted for the entire year. The other unit was vacant, to allow the remedial work on the ground floor to be carried out. | You have provided an expense allocation spreadsheet. | The property was vacated by the tenant in XXXX. | You have an engagement letter, in which your legal representatives state their scope of work, which includes resolving disputes arising from the lease and various property defects, negotiating a resolution to the issues with the tenants, and potential contribution to the damp problems. | Practical completion of the remedial works was in XXXX.