Hi,

Just a quick note.

The ATO notified that rental properties will be one audit focus for 2004, as it has been in past years.

They list some common income tax deduction mistakes.

Top of the list is the following:

Claiming the cost of carrying out initial repairs – such as rectifying damage, defects or deterioration that existed at the time of purchasing the property – as immediate deductions. These costs are capital expenditure and may be claimed as capital works deductions over either 25 or 40 years, depending on when they were carried out.

It is worth reading.

http://www.ato.gov.au/corporate/content.asp?doc=/content/45597.htm

Regards,

Glenn Wallace
Chartered Accountant, Business Adviser and Registered Tax Agent
http://www.businessadviser.com.au

Hi,

I wrote the following almost a week ago and decided not to post it as it probably was too wordy.

Anyway seeing as I have written it I might as well post it, as someone may gey some benefit from reading it, although it may be questionable that it sheds any further light on the original question.

Hi,

I don’t believe that the original question involved owning the property before it was used so the point was not relevant. However it is a good idea to bring it up as others reading the forum may take comments made to someone else’s questions and apply it to their own situation when that may not be appropriate.

Of course people should always consult an adviser in regard to their particular circumstances and not act directly on comments given in forums etc.

I thought I would expand on IT 2587 as other readers may be interested.

It 2587 has been withdrawn and a more current ruling is TR 97/23, however it is essentially the same.

The relevant extracts of both appear below. (Section 25-10 replaces section 53)

One still needs to be aware of what is an initial repair as this can be a turning point as to whether an amount is deductible or not.

The following two interpretative decisions shed some further light on the ATO’s interpretation.

http://law.ato.gov.au/atolaw/view.htm?find=%22ATO%20ID%202003%2F927%22&docid=AID/AID2003930/00001

and

http://law.ato.gov.au/atolaw/view.htm?find=%22ATO%20ID%202003%2F927%22&docid=AID/AID2003929/00001

Tr 97/23 talks about what the ATO considers is an initial repair.

“4. In this Ruling, the expression ‘initial repair’ refers to a repair by a taxpayer that remedies some defect in property or makes good damage to, or deterioration of, property being a defect, damage or deterioration:

(a)
existing when the property was acquired from another person (whether by purchase, lease or licence); and
(b)
not arising from the operations of the taxpayer who incurs the repair expenditure.
5. A repair is not an ‘initial repair’ simply because it is the first repair made after property is acquired. It is an ‘initial repair’ if repair is due when the property is acquired in the sense that the property has defects, damage or deterioration or is not in good order and suitable for use in the way intended.”

Following are some extracts from TR 97/23 and IT 2587 referred to earlier

TR 97/23 states in part:

“76. In appropriate circumstances, expenditure for repairs can qualify as a deduction even though the property has previously been held, etc., by the taxpayer for non-income purposes. This situation is different from an initial repair done to newly purchased or newly leased property, where the repair expenditure is capital expenditure.

77. A deduction is allowable under section 25-10 if, when the repair expenditure is incurred in a year of income, the property is held, etc., by a taxpayer for income purposes:

(a)
even though the property has previously been held, etc., by the taxpayer for non-income purposes; and
(b)
even though some or all of the defects, damage or deterioration arise from, or are attributable to, the taxpayer’s holding, etc., of the property before its holding, etc., for income purposes; and
(c)
provided that the repair expenditure is not capital expenditure. “

It 2587 states:

“4. Subsection 53(3) does not provide for apportionment of expenditure on repairs where an asset has been used by a taxpayer in earlier years of income for purposes other than that of producing assessable income. The subsection only provides for apportionment of expenditure where an asset is used by a taxpayer partly for income producing purposes in the year of income in which the expenditure on repairs is incurred.

5. Where an asset is used wholly for the production of assessable income during the year in which expenditure on repairs is incurred, the total cost of repairs is deductible provided of course that the expenditure is not of a capital nature. A deduction is allowable, even though some or all of the deterioration or damage giving rise to the repairs may be attributable to use of the asset by the taxpayer prior to its use for the purpose of producing assessable income (see Case V167, 88 ATC 1107; AAT Case 12 (1986) 18 ATR 3056).”

Hopefully you the reader have gained some benefit from the discussions and this wasnt too much to digest.

Regards,

Glenn Wallace
Chartered Accountant, Business Adviser and Registered Tax agent
http://www.businessadviser.com.au

Hi SMTM,

My pleasure

Regards,

Glenn Wallace
http://www.businessadviser.com.au

Even if you are single it is best to set up the structure to be as flexible as possible.

You may have the property for a long time and alot can happen in that time.

As previously suggested a corporate trustee is desirable to help in trying to keep your other assets protected.

As has been pointed out previously an insurance policy should help here.

This is true however, what if the wording of the policy means that the insurance company doesn’t have to pay? The company goes broke (HIH comes to mind). What if for some reason you are found criminally negligent? Or you have let the insurance policy lapse. These are some scenarios that come to mind.

Regards,

Glenn Wallace
http://www.businessadviser.com.au
These are just some general comments which should not be relied upon without getting professional advice in regard to your particular circumstances.

Hi,

There is an Australian Business Forum at http://www.businessadviser.com.au.

I run the site and you are most welcome to visit and join in the forum.

Regards,

Glenn Wallace
Chartered Accountant, Business Adviser and Registered Tax Agent
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