The impacts of a disaster may affect the types of expenses you can claim and the income you need to declare for your rental property or business premises.
Declaring income from an insurance payout
If you receive a payout for your rental property as a result of the disaster, you must include this amount as income on your tax return. This includes:
- insurance payouts for
- loss of rental income
- repairs
- replacements
- money received from a relief fund.
Money provided for immediate or urgent repairs may be exempt. You can phone us on 1800 806 218 to check.
Claiming deductions for repairs
You can claim a tax deduction for the cost of repairs to a rental property if it fixes defects, damage, or deterioration of the property.
The repairs can't involve substantial reconstruction or repair, or the replacement of an entire structure. This may be considered an improvement, the cost of which may be claimed over a number of years as a capital work deduction or a deduction for a decline in value (depreciation).
You can still claim a deduction for repairs to an unoccupied property if:
- the property was rented out immediately before the repairs were needed
- the damage being repaired occurred during the rental period.
Repair or improvement
You can claim a tax deduction for the cost of repairs to a rental property or business premises as long as the repairs don't involve either:
- substantial reconstruction or substantial repair
- the replacement of an entire structure, such as a fence.
A repair is work that fixes defects, damage, or deterioration of the property, for example:
- replacing part of the guttering or windows damaged in a cyclone
- replacing part of a fence damaged by a bushfire
- replacing the plasterboard in a wall damaged by flood inundation
- repairing electrical wiring or machinery damaged by a flood.
An improvement:
- provides something new
- generally extends the income-producing capability or expected life of the property
- generally changes the character of the item you have improved
- goes beyond just restoring the efficient functioning of the property.
Example: improvement to rental property
Tim replaces a fibro wall inside his rental property, which was damaged by a flood, with a brick feature wall.
The new wall is an improvement because Tim did more than just restore the efficient function of the wall. This means he can't claim the cost of the new wall as a repair but he can claim the cost as a capital works deduction.
But if Tim had replaced the fibro with a modern equivalent such as plasterboard, he could have claimed his costs as a repair. This is because it would have merely restored the efficient function of the wall without changing its character, even though a different material was used.
End of exampleIf you carry out work that includes both repairs and improvements to your property, you can claim a deduction for the cost of your repairs if you can separate their cost from the cost of the improvements.
If you hire a builder or other professional to carry out these works for you, ask for an itemised invoice to help work out your claim.
Example: repair to rental property
Ling's rental property is partially inundated with water due to flooding, causing damage to the bathroom vanity unit. She is advised that the vanity unit can be fixed but needs to be dismantled first. Ling decides to re-tile the bathroom (as the colour is a bit dated) while the vanity unit is being repaired.
The new parts for the vanity unit are considered a repair as they just restore its function. The re-tiling is not a repair. Ling would need to know the cost of each component of the work so she could claim her repair and her capital works deductions correctly.
End of exampleRepairs to depreciable items
The cost of repairing a depreciable item is an allowable deduction, but the replacement of a depreciable item with a new depreciable item is not a repair.
Example: deduction for replacement depreciable items
Caitlin's rental property is partially inundated with water due to flooding. She needed to replace the carpet in the lounge room and one of the bedrooms. She decided to replace the carpet throughout the property.
If Caitlin had just repaired the damaged carpet, she would have been allowed a deduction for the repair. However, as the whole carpet was replaced, she may be able to claim a deduction for the adjustable value of the carpet that was disposed of and a deduction for the decline in value of the new carpet.
End of exampleUnoccupied properties
You can still make a deduction for repairs to an unoccupied property, provided:
- your property was rented out immediately before the repairs were needed
- the damage being repaired occurred during the rental period.
Example: deduction for unoccupied property repairs
Ben's rental property was tenanted when it was severely damaged by a cyclone. Due to the damage, the tenants had to move out.
Ben carried out repairs and then advertised the property for rent. Even though the property was not available for rent while being repaired, he is able to claim his repairs.
End of exampleFor more detail on repairs, refer to Taxation Ruling TR 97/23 – Income tax: deductions for repairs.
Claiming deductions for replacements
You can claim the replacement of property or items in the following circumstances:
- Your rental property or business premises were destroyed – you may be able to claim the cost of rebuilding as a capital works deduction over 25 to 40 years.
- You have to replace an item of capital equipment (such as a complete fence or building, a stove, kitchen cupboards or a refrigerator) – you may be able to claim the cost as a capital works deduction over a number of years or a deduction for decline in value.
- You replace a depreciating asset costing $300 or less, not used as part of a set that costs more than $300 when combined – you can generally claim an immediate deduction.
Example: replacement versus capital costs
Janet has owned and rented out a residential property since 12 January 1983. When the kitchen cupboards were damaged beyond repair during a flood, she replaced all of the kitchen fixtures with new items, including the cupboards and appliances.
The kitchen cupboards are capital items with their own function. This means the cost of completely replacing them is a capital cost. Because of this, Janet can only claim a:
- capital works deduction for the construction cost of this work
- deduction for the decline in value of the kitchen appliances.
This is the case whether or not:
- the new fittings are of a similar size, design, and quality as the originals
- the new cupboards are made from a modern equivalent of the material used in the originals
- the layout and design of the new kitchen may be substantially the same as the original.
Claiming deductions for vacant land
If your rental property, holiday rental or business premises is damaged or destroyed by a natural disaster, you may still be able to claim deductions for holding costs of the vacant land.
Where the premises were rented out, available for rent or used in business prior to the natural disaster, you can claim a deduction under the exceptional circumstances exemption.
If the exemption applies to your circumstance, you can continue to claim deductions for 3 years from when the disaster occurred. This period may be extended if required by applying to the Commissioner of Taxation.
This exemption also applies where a natural disaster impacts farmland, damaging or destroying structures such as fences on land used in primary production, silos, or woolsheds.
GST implications for rental properties
If you are registered for goods and services tax (GST) and it was payable in relation to your rental income, don't include it in the amounts you show as income in your tax return.
Where the cost of repairs includes GST, you may be entitled to input tax credits if you're registered for GST and incur the cost in the course of your enterprise. If you are entitled to claim input tax credits for rental expenses, you don't include the GST credits in the amounts of expenses you claim.
If you are not registered for GST, or the rental income was from residential premises, you include any GST in the amounts of rental expenses you claim.
Main residence exemption for a rental
If you rent out a property that was your main residence, you can treat your former home as your main residence for up to 6 years.
If the dwelling you rent out was destroyed in a disaster, the 6-year period starts from the day you first rented out your main residence.
CGT implications on loss of asset
If you receive an insurance payout for the loss or destruction of a capital gains tax (CGT) asset, you need to work out your capital gain or loss and include it in your tax return. That is unless you're eligible to defer the capital gain. As a capital loss can only be offset against a capital gain, you may carry forward the loss to deduct it from capital gains in future years.
You will have a capital gain if your insurance payout is more than the asset’s cost base.
You will have a capital loss if your insurance payout if less than the asset’s reduced cost base.
The CGT event happens when:
- you first receive compensation for the loss or destruction of your asset, or
- the loss is discovered or the destruction occurred if you don't receive any compensation.
Example 1: determining the date of your CGT event – Laurie
Laurie owned a rental property that was destroyed by cyclone in February 2011. He received a payment under an insurance policy in April 2011.
The CGT event happened in April 2011 when Laurie received the insurance payment.
End of example
Example 2: determining the date of your CGT event – Marie
Marie owned a rental property that was damaged by flood in January 2011. Her local council deemed the property uninhabitable. She received a payment under an insurance policy in September 2011.
The CGT event happened in September 2011 when Marie received the insurance payment.
End of example
Example 3: determining the date of your CGT event – Christine
Christine owned a rental property that was damaged by flood in January 2011. Her local council deemed the property uninhabitable in May 2011, and it was demolished in October 2011. She didn't receive any compensation.
The CGT event occurred in January 2011 when the damage occurred.
End of exampleCapital works implications for a rental property
If you've been claiming a capital works deduction for a rental property that is destroyed or demolished, you can claim a deduction for the remaining amount of construction expenditure that has not yet been deducted, less any compensation you receive or are entitled to receive. This applies even if the destruction or demolition is voluntary.
You can claim the deduction in the income year in which the destruction occurs.
The deduction is reduced if the capital works are used in an income year only partly for the purpose of producing assessable income.
The types of expenses you can claim and the income you have to declare if you own a rental property or business premises that has been impacted by a natural disaster.