In May 2018, Ken decided to sell his investment property. After his tenant vacated the property and he was no longer receiving rental income, Ken discovered a hole in the living room wall that had been covered with a painting. In August 2018, He paid for a handyman to repair the hole in the wall to its original condition. The property was subsequently sold in November 2018 at auction.
Is Ken entitled to claim a deduction for wall-repairing costs?
The cost of the repair to the wall would ordinarily be capital expenditure and not deductible under s 25-10. Further, a deduction is not allowed for the repair in August 2018 under the approach in Taxation Ruling IT 180. This ruling provides the ATO’s guidance on the deductibility of repair cost after a property ceases to be used for an income- producing purpose. Specifically, the cost of repair maybe deductible of a) the necessity for the repairs can be related to the period of time during which the premises were producing assessable income; and B) the premises have been used for the production of assessable income during the income year in which the expenditure is incurred.
In Ken’s case, it is reasonable to conclude that the defects to the property related to the period to which it was tenanted. However, deductions for the costs of the relevant repairs incurred are limited to the 2017/18 year only as this was the last income year that the property was used to produce assessable income. Therefore, Ken is not allowed to claim a deduction for the cost of fixing the hole in the wall as it was incurred during the 2018/19 year when the property was no longer being used to produce assessable income.