Rental income derived from property
Less: Deductible Expenses
General repair and maintenance
Management Commission computed @ 5%
Capital deduction (Replacement of Roof Top)
Fixing door expenses repair
Depreciable Assets (Decline in value @ prime method)
Cumulative deductible expenses
Net income from Property for George
The various relevant calculations to derive at the above figures are highlighted below.
Management Commission is given as 5% of the total rent income derived by George or 5% of 13900 which comes out as $ 695.
Capital reduction has been claimed for the roof (explained in part b) and deduction is available at the rate of 2.5% of the total capital expenditure incurred (Barkoczy, 2015). Hence, 2.5% of 15000 = $ 375.
The depreciation in accordance with the prime method is calculated as per formula given in Division 40.75, ITAA, 1997 (Austlii, 2016b). This is shown below.
Decline in Value = Asset’s cost * (Days held/365) * (100%/Effective life of the Asset)
In the given case, the following assets have been deemed to be acquired on December 1, 2015.
Stove (Asset Cost : $ 900, Effective Life: 12 years)
Hot Water Service (Asset Cost : $ 2,000, Effective Life: 12 years)
Carpets (Asset Cost : $ 3,500, Effective Life: 10 years)
Furniture and Fixtures (Asset Cost : $ 5,000, Effective Life: 13(1/3) years)
New Furniture and Fixtures (Asset Cost : $ 1,200, Effective Life: 13(1/3) years)
Days used in FY2016 (From December 1, 2015 to June 30, 2016) = 213 days
Hence, usage as a portion of year in FY2016 = (213/365) = 0.58
The calculation of the depreciation on the above assets is captured below (Nethercott, Richardson and Devos, 2016).
b) The detailed explanation for the items included in the above income statement is offered below.
Repairs & Maintenance
In accordance with Section 25-10, ITAA 1997, the taxpayer may claim deduction for expenses incurred on repairing of any damaged caused to the property that is producing assessable income (Austlii, 2016a). In accordance with tax ruling TR 97/23, repairs focus on providing remedy to the damaged portion with the aim of ensuring that the efficiency of the part or component is restored without any alteration in the character. Therefore, the repair focuses on correcting of a defect or replacing a constituent part of any item which is malfunctioning as it has been worn or damaged. It is imperative to note in the light of TR 97/23 that any expense incurred to prevent any damage being caused to the property would not constitute as repairs as these are done only after damage has been caused. Further maintenance typically involves expenses that are incurred for keeping the property in a condition where it is tenantable and hence requires that any fences that are faded should be painted or interior walls that are damaged should be fixed (ATO, 1997).
Hence, in case of George, the door which is damaged has been repaired and the expense can be claimed as repair under Section 25-10, ITAA 1997. The general repairs and maintenance expenses to the tune of $ 5,000 are also deductible since these have been incurred for ensuring that the property remains tenantable. However, no immediate deduction is available for the expense incurred on repainting the front fence since apparently there is no information of it being faded or suffered any deterioration.
As per TR 97/23, there is stark difference between repairs and improvement. In order to differentiate between the two, consideration needs to be given to the impact of expenditure incurred on the efficiency with which the function would be performed. In the event, there is a significant improvement of efficiency which cannot be justified through mere repair, then it constitutes as improvement. One of the key mechanisms to achieve the same is through use of different materials due to difference in their innate physical and chemical properties that can potentially increase durability and performance. If with a different material also, only the previous efficiency is restored, then it would be classified as repair and immediate deduction is available (ATO, 1997). However, if the improvement in efficiency far exceeds the previous efficiency, then it refers to improvement and thus deduction would be available on the same in a phased manner i.e. @ 2.5% pa (ATO, 2016).
This has also been highlighted in the FC of T v Western Suburbs Cinemas Ltd (1952) 86 CLR 102 where the High Court ruled that since the expenditure resulted in improvement of efficiency which exceeded the original part also and also involved the usage of a different and perhaps superior part implies that no immediate deduction may be claimed as it does not fall within the ambit of Section 25-10 (ATO, 2001). However, deduction for the same is available as per Division 43 (Barkoczy, 2015).
In the given case also, the roof top has been damaged but it has been replaced in its entirety with a different material which tends to cause an increase in the shelf life. Clearly, this is not repair but improvement, hence immediate deduction on the expense would not be available and gradual deduction @ 2.5% is to be applied as per Division 43, ITAA 1997 (Nethercott, Richardson and Devos, 2016).
Commission and Fees for property management
As per ATO (2015), any cost incurred by the property owner with regards to commission and fees being extended to the agent who is responsible for collection of rent and management of property otherwise would be eligible for immediate deduction in the rental income statement as is the case with George where 5% commission has been deducted.
ATO (1997), TR 97/23, Retrieved on September 5, 2016 from
ATO (2001), ATO ID 2001/49, Retrieved on September 5, 2016 from
ATO (2015), Rental Properties -2015, Retrieved on September 5, 2016 from
ATO (2016), Rental Property Expenses, Retrieved on September 5, 2016 from
Austlii (2016a), INCOME TAX ASSESSMENT ACT 1997 - SECT 25.10, Retrieved on September 5, 2016 from
Austlii (2016b), INCOME TAX ASSESSMENT ACT 1997 - SECT 40.75, Retrieved on September 5, 2016 from
Barkoczy, S. (2015), Foundation of Taxation Law 2015, North Ryde: CCH Publications,
Nethercott, L., Richardson, G. & Devos, K. (2016), Australian Taxation Study Manual 2016, Sydney, NSW, Australia: Oxford University Press