Can you claim an immediate deduction in the year ended DDMM20YY for the expenses you incurred for garden maintenance, bath resurface, interior and exterior painting?
Yes Question Can you claim a capital works deduction for a portion of the cost of the following expenditure incurred on your rental property under Division 43 of the ITAA 1997? • installation of ceiling insulation • rewiring of property, light fittings, switches and power points • re-tiling of bathroom walls. Answer Yes. Question Can you claim a deduction for the decline in value of the new bathroom vanity and hand basin, bathroom taps and shower head, window treatments (blinds and curtains), carpet, and floating timber flooring as depreciating assets under section 40-25 of the ITAA 1997? Answer Yes. Question Can you claim an immediate deduction in the income year you incurred expenses for council rates and landlord insurance under section 8-1 of the ITAA 1997? Answer Yes. Question Can you claim the full amount of mortgage interest paid on your rental property for the year ended DDMM20YY? Answer Yes. Question Is the amount you received from the XXXX for holding the property until the execution of the tenancy agreement assessable as rental income? Answer Yes. Question
Can you claim a deduction for the full amount of the donated rental amount paid to the XXXX in the year ended DDMM20YY? Answer Yes. This ruling applies for the following period : Year ended 30 June 20YY The scheme commenced on: 1 July 20YY
You own a rental property which has been used to produce assessable income since purchasing it in 20YY. You have a mortgage on the property and incurred mortgage interest payments in year ended DDMM20YY. The property was rented from DDMM20YY and became vacant on DDMM20YY. You undertook renovation and maintenance while the property was vacant. The work undertaken included: • bathroom renovation: including wall re-tiling, installation of new vanity unit and hand basin, shower head and tapware, and bath resurface • internal and external painting and patch repair • installation of ceiling insulation • rewiring of property and installation of light fittings, switches and power points • installation of floating floor • installation of new carpet • replacement of window treatments (blinds and curtains). The works were completed on DDMM20YY. During this time, you decided to rent the property through a humanitarian visa settlement program. The refugee sponsorship paid you an amount of $XX to hold the property until a Payment Direction Deed (PDD) with XXXX was executed. The chosen tenant did not arrive in Australia until DD MM due to visa delays.
You signed a Payment Direction Deed (PDD) with XXXX on DDMM20YY. XXXX is a public benevolent institution (PBI), registered under the XX XX XX XXeffective from DDMM20YY. XXXX is endorsed as a Deductible Gift Recipient (DGR) from DDMM20YY. The property was independently assessed for the market value of rent at this time at $XX per week. XXXX will rent the property to individuals in need at a reduced rate consistent with the XXXX XX Program under a residential tenancy agreement. Under the PDD you lease the property to XXXX at the market rate for a fixed period. XXXX will pay you the rent, less amounts due by you to XXXX. On DDMM20YY you entered a 12-month property management agreement with XX XXXX. You will be provided with statements detailing rental income and rental expenses (such as management fees). The tenant signed the lease at this time. The PDD states that you will donate to XXXX an amount of $XX per week by deduction from each monthly rental payment. XXXX will provide you with an annual receipt of the donated amount. You will pay a management fee equal to X% of the annual rent and deducted monthly from rental payments.
XXXX will manage the property including periodic inspections, monitoring of rent receipts and outgoings and repairs and maintenance. You are responsible for payment of any costs for repairs and maintenance, insurance, rates and charges in respect of the property. You do not receive any advantage or benefit from XXXX. You paid the annual council rates for the property on DDMM20YY. You paid the annual building/landlord insurance on DDMM20YY. You received a summary of income and expenses from XXXX for the period DDMM20YY to DDMM20YY detailing rental income of $XX and management fee expenses of $XX. You received an income and expenditure summary for the property from XX for the period DDMM20YY to DDMM20YY detailing rental income of $XX and management fee expenses of $XX. You received a tax receipt from XXXX advising donations made between DDMM20YY and DDMM20YY of $XX have been applied as rent relief to the tenants of the property.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 25-10 Income Tax Assessment Act 1997 Division 40 Income Tax Assessment Act 1997 Division 43 Income Tax Assessment Act 1997 section 30-15 Income Tax Assessment Act 1997 Division 30 Income Tax Assessment Act 1997 Subdivision 30-AB
Repairs Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: • the extent of the work carried out represents a renewal or reconstruction of the entirety, or
• the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or • the work is an initial repair. Paragraph 123 of TR 97/23 provides that a repair restores the efficiency of function of the property (without changing its character) not whether the same material as the original is used. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.
Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. 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. Application to your circumstances In your case, you will still be considered to hold a rental property for income purposes at the time of the repairs even if it was vacant at that time as you have rented the property again when the repairs were completed. Garden maintenance You can claim an immediate deduction in the income year you incurred the expenses for the garden maintenance, such as lawn mowing. A deduction is allowable under section 25-10 of the ITAA 1997. Bath resurface
You can claim an immediate deduction in the income year you incurred the repair to the bath as the resurfacing of the bath involves restoration of its function without changing its character and is restoration to its former condition to make good damage or deterioration. A deduction is allowable under section 25-10 of the ITAA 1997. Painting and repairs The interior and exterior patch repairs and painting are considered to be deductible repairs. This work is not regarded as capital in nature and is considered as normal maintenance expenditure to rectify existing deterioration. Therefore, a deduction is allowable under section 25-10 of the ITAA 1997. Capital works Division 43 of the ITAA 1997 provides a deduction for capital works attributable to a construction expenditure area that is owned or leased by the taxpayer and used during the income year for the purposes of producing assessable income. Capital works includes buildings and structural improvements and also extensions, alterations or improvements to buildings and structural improvements. You claim a capital works deduction at the rate of 2.5 % per year over 40 years for the expenses incurred for the capital works.
Your total capital works deductions cannot exceed the construction expenditure. No deduction is available until the construction is complete. If, however, during an income year the building cannot be rented or made available for rent, but it is expected to be made available for rent again, then you cannot claim a deduction for capital works for the number of days that the building isn't available for rent. Application to your circumstances Ceiling insulation Insulation batts, although generally not fixed, are intended to remain in place indefinitely, do not have a separate visual identity and add to the completeness of the structure. They are also part of the premises. As such, they are considered to form part of the fabric of the building and are considered capital works. A capital works deduction is allowed for this expenditure under Division 43 of the ITAA 1997 for the period the property was available for rent. Electrical rewiring
The costs associated with the electrical works are not deductible as repairs. New wiring, installation of power points and switches at the property are affixed permanently to the building and cannot be easily removed without causing damage. As such, they are considered to form part of the fabric of the building and are considered capital works. A capital works deduction is allowed for this expenditure under Division 43 of the ITAA 1997 for the period the property was available for rent. Bathroom tiling Tiling, and associated plumbing work including removal of tiles, is considered to be capital in nature as they are considered to be permanently affixed and not easily removed without damage. An immediate deduction is not allowable. A capital works deduction is allowed for this expenditure under Division 43 of the ITAA 1997 for the period the property was available for rent. Depreciating assets 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.
For depreciating assets costing more than $300 you can claim deductions for the decline in value over their effective useful life. Depreciating assets are those items that can be described as plant, which do not form part of the premises. These items are usually: • separately identifiable • not likely to be permanent and expected to be replaced within a relatively short period and not part of the structure. Application to your circumstances Examples of assets to which deductions for decline in value can be applied include timber flooring, carpets, window treatments, tapware and shower fittings. Immediate deduction for depreciating assets costing $300 or less Where a depreciating asset costs less than $300 you are able to claim an immediate deduction rather than depreciate the asset over a period of time where the asset has been used for income producing activity. An immediate deduction is available if all of the following tests are met in relation to the asset:
• it cost $300 or less and you used it mainly for the purpose of producing assessable income that was not income from carrying on a business (for example, rental income where your rental activities did not amount to the carrying on of a business of letting rental properties) • it was not part of a set of assets costing more than $300 that you started to hold in the income year, and • it was not one of a number of identical, or substantially identical, assets that you started to hold in the income year that together cost more than $300. The expenses that are below $300 can be claimed as an immediate deduction in the year ended 30 June 20YY. For those depreciated assets costing greater than $300 you can claim a deduction for a decline in value over their effective useful life while the property is used to produce assessable income. Rates and insurance Council rates and landlord insurance are an allowable deduction where a property is used solely for income producing purposes. You can claim a deduction for local government rates and levies for the period your property is rented or is genuinely available for rent.
Some expenses are part and parcel of property ownership. If the property is a rental property, the expenses are fully tax deductible. They are: • Local Government / Council Rates • Water and Sewerage Rates, Levies and Charges (that are not paid by the tenant) • Insurance (building, contents, public liability, loss of rent and malicious damage) • Strata Levies (but not special levies for capital works) • Land Tax Mortgage insurance An individual taxpayer, who is not in business, can deduct losses and outgoings under section 8-1 of the ITAA 1997 to the extent that they are incurred in gaining or producing their assessable income and are not of a capital, private or domestic nature. Deductions under section 8-1 are also not available to the extent that the losses and outgoings relate to gaining or producing exempt income or are prevented by a provision in the Income Tax Assessment Act 1997. To be deductible, interest must be incurred in gaining or producing your assessable income which will depend on the facts and circumstances relating to the interest expense.
If you take out a loan to purchase a rental property, you can claim the interest charged on that loan as a deduction. However, to the extent that the loan is used or refinanced for a private purpose, you must apportion the interest expense to account for the private use. If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or genuinely available for rental, in the income year for which you claim a deduction. You can't claim a deduction for interest expenses you incur if either: • you start to use the property for private purposes • you refinance an investment loan for private purposes or otherwise use the loan for a private purpose. Ordinary income Amounts received for holding rental property Rental and other rental-related income is the full amount of rent and associated payments that you receive, or become entitled to, when you rent out your property. Rent is regarded as ordinary assessable income. The payment relates to loss of rental income and is assessable as ordinary income under subsection 6-5(2) of the ITAA 1997.
Application to your circumstances The amount you received from the XXXX for holding the property until the execution of the tenancy agreement in the year ended 30 June 20YY is assessable as rental income. Deductibility of donation under a payment direction deed The meaning of gift for the purposes of Division 30 of the ITAA 1997 is dealt with in Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift. Division 30 of the ITAA 1997 provides that the types of non-testamentary gifts (to the value of $2 or more) to a DGR that can be deductible include: • money • property (including trading stock) purchased during the 12 months before the gift was made • property valued by the Commissioner at more than $5,000 • an item of trading stock disposed of outside the ordinary course of business • property under the Cultural Gifts Program, or • gifts of places listed in the Register of the National Estate. Paragraphs 12-14 of Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift describes a gift as having the following characteristics and features: • there is a transfer of the beneficial interest in property • the transfer is made voluntarily
• the transfer arises by way of benefaction, and • no material benefit or advantage is received by the giver by way of return. Item 1 of the table in section 30-15 of the ITAA 1997 provides a deduction for gifts and contributions to endorsed DGR's if the gift or contribution satisfies the requirements in that section. Under the PDD, the landlord directs XXXX to deduct the donation amount from the rent received under the lease agreement and pay it to XXXX. Prior to the donation amount being paid to XXXX the landlord has beneficial interest in the rent paid under the lease agreement. Following the payment of the donation amount, ownership of the money transfers to XXXX who can use it as they decide. The donation is made when the donation amount is transferred to XXXX' own account and they no longer hold it as agent for the landlord. Donation amounts paid by a landlord to XXXX in accordance with an executed Payment Direction Deed are tax deductible gifts for the purposes of section 30-15 of the Income Tax Assessment Act 1997 (ITAA 1997). However, the donation amounts cannot create or add to a tax loss of the landlord (s 26-55 ITAA 1997).
Subdivision 26-55(1) of the ITAA 1997 states that there is a limit on the total amount you can deduct for the income year under Division 30. This means the deduction can reduce the donor's assessable income to nil in the income year in which the gift is made but cannot contribute to a tax loss of the donor for the income year. While a deduction for a gift cannot contribute to a tax loss for the donor, Subdivision 30-DB allows a donor to elect to spread a tax deduction for a gift of money of $2 or more over up to 5 years. If a donor chooses to spread a deduction the election must be made as specified in section 30-248, including: • The election must be in the approved form and must be made before lodging the tax return for the year in which the gift was made • The election must start in the year the gift was made and continue up to four years immediately following, and • The election must contain the percentage to be claimed each year, which may be different in each year, but the total percentage must not exceed 100% over the years. Application to your circumstances
Donation amounts you paid in accordance with the executed PDD with XXXX in the year ended 30 June 20YY are tax deductible gifts for the purposes of section 30-15, subject to any effect of subdivision 26-55 as outlined above. You can elect to spread the tax deduction over up to 5 years. Further issues for you to consider Number of weeks property was rented You must enter the number of weeks the property was rented, or genuinely available for rent, during the income year. Refer to the information on the ATO website at: QC 66383 - Rental property genuinely available for rent.