Edited version of your written advice

Authorisation Number: 1013063485871

Date of advice: 29 July 2016

Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for replacing part of a pool fence and replacing smoke detectors to your investment property?

Answer

No.

Question 2

Are you entitled to a capital works deduction for replacing part of a pool fence and replacing smoke detectors to your investment property?

Answer

Yes.

Question 3

Are you entitled to a deduction for cleaning products and other hardware equipment for your investment property?

Answer

No.

Question 4

Are you entitled to a deduction for meal expenses consumed whilst undertaking inspection and maintenance of your investment property?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2017

The scheme commenced on

1 July 2016

Relevant facts and circumstances

You recently purchased a residential investment property interstate.

Pool fencing

The residential investment property has a fenced pool

Part of the pool fence and gates do not meet legal requirements in that state.

Two sections of the pool fence will be required to be raised in height.

Two gates will be required to be replaced with self-closing, self-latching gates.

Smoke detectors

The residential investment property had smoke detectors.

Smoke detectors within the property required replacement to meet legal requirements in that state.

New smoke detectors were also installed.

Cleaning products and other hardware

You purchased cleaning products and other hardware equipment to clean and restore the residential investment property to maximise rental income.

Meal expenses

Due to your purchase of a residential investment property in another state, you will be required to travel to the property on occasion to inspect the property and undertake maintenance.

You will be required to purchase food and drink on these occasions.

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 43-10

Reasons for decision

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Pool fence and smoke detectors

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 97) allows a deduction for the cost of repairs to premises used for income-producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 discusses the circumstances in which expenditure incurred for repairs may or may not be an allowable deduction under section 25-10 of the ITAA 1997.

The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time (paragraph 15 of TR 97/23).

While some works may be fairly described as repairs, the expenditure will be considered capital in nature in some situations, and therefore, not deductible under section 25-10 of the ITAA 97. Expenditure incurred for repairs to property used for income-producing purposes is of a capital nature where:

1. the works result in a greater efficiency of function in the property, therefore representing an improvement rather than a repair; or

2. the extent of the work carried out represents a renewal or reconstruction of the entirety, or

3. the work is an initial repair.

An improvement

An 'improvement' 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.

In your case, remedial work carried out on the investment property would not be considered an improvement as it was simply done to restore the property's normal function as a residential property.

Initial repair

If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. The cost of affecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred.

The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to or deterioration of, property is capital expenditure if the defect, damage or deterioration:

(a) existed at the time of acquisition of the property; and

(b) did not arise from the operations of the person who incurs the expenditure.

It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price reflected the need for repairs. An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit yielding structure. It is capital expenditure and is not deductible under section 25-10 of the ITAA 97.

In your case, the remedial work carried out to the pool fence and gates on the residential investment property needed to be done due to compliance with legislative requirements and not as a result of its use as a rental property.

As the remedial work carried out on the residential investment property was to repair a defect existing at the time the property was acquired, the repair is considered an initial repair and therefore, capital in nature.

As capital expenditure, you are entitled to a capital works deduction under section 43-10 of the ITAA 1997 for the part replacement of the pool fence and gates. The relevant rate allowed for your capital works deduction is 2.5% per annum over 40 years while the property is being used for an income producing purpose.

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose.

A depreciating asset is an asset that has a limited effective life and can be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997).

Smoke detectors are regarded as depreciating assets for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction where they are used for income producing purposes.

To constitute a repair for the purposes of section 25-10 of the ITAA 1997, work done to meet the requirements of regulatory bodies must satisfy the general principles and the various factors discussed in TR 97/23. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible. However, work done solely to meet requirements of regulatory bodies is not a repair for the purposes of section 25-10 of the ITAA 1997.

Cleaning products

When a rental property is not available for rent the necessary connection in deriving rental income is lost and therefore no deduction for rental expenses is allowable.

In your situation it is considered that your property was not available for rent and that your purchase of the supplies was to prepare the property for tenants. Therefore the cost of these supplies, are not deductible under section 8-1 of the ITAA 1997.

When a property is not available for rent you cannot claim a deduction for the portion of any expenditure that relates to that period. For example, council rates paid for a full year would need to be apportioned between when a property is available for rent and not available for rent.

Meal expenses

Generally, the cost of travel incurred by a taxpayer to inspect or maintain rental properties or to collect rent is an allowable deduction under section 8-1 of the ITAA 1997. A full deduction is allowed where the sole purpose of a trip relates to the rental property.

However, where travel expenses are incurred as a result of mixed purposes, being incurred partly for the purposes of rent collection, inspection or maintenance of the rental property, and partly for private purposes, only that portion relating to the rental property is an allowable deduction.

If the travel claim is for private purposes only, no part of the expense is deductible. It is the purpose of the travel which primarily determines whether the expenses incurred are deductible, and that purpose must have a clear connection to the taxpayer's earning rent, which is assessable income.

If a rental property is interstate, the taxpayer is entitled to claim a deduction for return expenses incurred in travelling to the rental property. Where an overnight stay is involved, the taxpayer would be entitled to claim for travel, meals and accommodation. Where no overnight stay is involved, no deduction is allowable for meals.

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