Rental expense claims can be complex to determine, says chartered accountant GAIL FREEMAN, especially whether the cost was for a genuine repair or if it was capital in nature.

The tenant of Randa’s Gold Coast unit caused serious damage and she wants to understand how this impacts her rental property tax claims.

“The timing couldn’t have been worse,” Randa said. “Just as my tenant’s lease was about to end, they caused serious damage to the bathroom floor. I had no choice but to adjust the bond, take the property off the rental market and bring in tradespeople immediately.

“Will The ATO let me claim these costs, even though the unit wasn’t available for rent for a time?”

I told her that rental expense claims can be complex to determine and that the ATO closely monitors these claims.

“They assess whether your property was genuinely available for rent through various data-matching tools,” I said. 

“The ATO applies specific criteria to determine whether property expenses are deductible. The first question to consider is whether the cost was for a genuine repair or if it was capital in nature. 

“If you’re replacing damaged tiles or repairing the subflooring simply to restore the bathroom to its original condition, that’s generally deductible in the year the expense is incurred.

“However, if you choose to install heated flooring or upgrade to higher-quality materials, the work is likely to be considered capital in nature, meaning it must be claimed over time through depreciation.”

Randa nodded. “We didn’t rip everything out – we fixed what was broken with like-for-like materials,” she said. 

“That helps,” I told her. “It supports the position that the work was restorative, not an enhancement. The other key test is whether the property was genuinely held to produce rental income on a commercial basis. 

“The ATO looks at circumstances – booking history, tenancy agreements, advertising or letting agent records and agent communications to confirm the property was genuinely available for rent before and after the interruption.”

Randa said: “So because it’s a long-term rental, the fact we had a tenant and we only temporarily paused tenancy activity doesn’t count against me?”

“No,” I replied. “If the lack of rental income was a direct consequence of repairing tenant-caused damage and you can show you intended to continue renting out the property – evidence such as ongoing lease arrangements, correspondence with your agent, and prompt action to obtain repairs – the expenses should remain deductible.”

I also cautioned Randa about common pitfalls when claiming long-term rental expenses. 

“You must apportion expenses if you use the property for private purposes or decide not to rent it in future,” I said. 

“Significant improvements unrelated to the tenant’s damage are probably not immediately deductible and will need to be claimed over time through depreciation”.

I recommended that the best practice in these circumstances was asking tradespeople to itemise their invoices so genuine repair work could be clearly separated from any upgrades.

I also advised keeping evidence that the vacancy was necessary due to tenant damage, together with a record of the dates the property was unavailable, in case the ATO requests this. 

“Maintain comprehensive records of insurance documentation – including policy details, claim forms, correspondence with insurers and settlement statements – so you can support your claim,” I said.

Randa breathed easier. “Okay, I’ll gather the invoices, photos and the agent’s notes and send them to you.”

Written by accountant Chetan Chopra.

If you need advice on rental property claims or any other tax-related matter, please contact the expert team at Gail Freeman & Co Pty Ltd on 6295 2844, email [email protected] or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

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