Issue
Is the taxpayer entitled to a deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of initial repairs to a rental property that was made available for rent before the repairs were carried out?
Decision
No. The taxpayer is not entitled to a deduction under section 25-10 of the ITAA 1997 for the cost of initial repairs to the rental property because the expenditure is capital in nature.
Facts
The taxpayer purchased a residential property that was in a state of disrepair.
Soon after purchasing the property, the taxpayer listed the vacant property with a real estate agent for rental. There was no legal impediment to the renting out of the property as a result of the state of disrepair.
After listing the property, the taxpayer incurred costs in carrying out repairs to remedy the defects which existed at the time of purchase.
Reasons for Decision
Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises held or used for the purpose of producing assessable income. No deduction is allowable for capital expenditure under this section.
Where a property is not yet actually being rented it will be considered to be 'held' for the purpose of producing assessable income where the property is genuinely available for rent as evidenced by the taxpayer undertaking active and bona fide efforts to let the property at a commercial rental. This would include such activities as listing the property with a real estate agent, placing advertisements in newspapers, and not restricting availability (for example, by making the property unavailable for rent during holiday periods) to prevent the taxpayer's use and enjoyment of the property being affected. ( Case R118 84 ATC 773; (1984) 27 CTBR (NS) 1318; Case P116 82 ATC 590; (1982) 26 CTBR (NS) 372, and Case V133 88 ATC 847)
The taxpayer has listed the vacant property with a real estate agent and there is no impediment to it being immediately rented out. As such, the property is available for rent and therefore being 'held' for the purpose of producing assessable income.
Initial repairs relate to the remedying of defects, damage or deterioration to a property that existed at the time of acquisition and did not arise from the operations of the taxpayer who incurs the repair expenditure (paragraph 4 Taxation Ruling TR 97/23).
Taxation Ruling TR 97/23 at paragraph 59, confirms that expenditure incurred on initial repairs is capital expenditure and is, therefore, not deductible under section 25-10 of the ITAA 1997. This paragraph also states that the cost of effecting initial repairs is still not allowable even if some income has been earned before the repair expenditure is incurred. In other words, the character of initial repairs is not altered because income is derived from the property before the expenses are incurred on the initial repairs. This would apply equally where the property is being 'held' for rental purposes but no rent has yet been derived.
As the property was in a state of disrepair at the time of acquisition and none of the defects arose in the course of the taxpayer renting out the property, the repairs carried out by the taxpayer are initial repairs and capital in nature.
Accordingly, the taxpayer is not entitled to a deduction, under section 25-10 of the ITAA 1997, for the cost of the initial repairs to the rental property that was made available for rent before the repairs were carried out.