Deductibility of rental property expenses - electricity power guarantee

Is the amount of the annual power guarantee the taxpayer pays in respect of their rental property an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The annual power guarantee the taxpayer pays in respect of their rental property is an allowable deduction under section 8-1 of the ITAA 1997.

An annual power guarantee was imposed on the taxpayer's rental property when the electricity supply was connected to the property.

The power guarantee is imposed on the property because it is in a rural/remote area and is imposed for a period of ten years.

If the tenants do not consume more than or equal to the guarantee amount in electricity then the taxpayer as the landlord must supplement the difference between the amount paid by the tenant and the minimum amount under the guarantee.

If the minimum amount under the guarantee is not paid the electricity will be disconnected.

Section 8-1 of the ITAA 1997 allows a deduction for all losses or 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, or relate to the earning of exempt income.

In order for a loss or outgoing to be deductible under section 8-1 of the ITAA 1997 expenditure must have the essential character of an outgoing incurred in gaining assessable income ( Lunney v. Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166). There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (1949) 8 ATD 431), and the expenditure must not be capital, private or domestic in nature.

The power guarantee is imposed on the property on an annual basis and, as the owner of the property, the taxpayer must supplement any shortfall in power consumption. The power guarantee is a cost that is directly incurred by the rental property owner in the course of earning assessable income from the property. Like rates, insurance premiums and land tax payments, it is an ongoing expense of a revenue nature and not a capital expense for the purposes of section 8-1 of the ITAA 1997.

Accordingly, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the amount of the power guarantee.