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My question is about the deductibility of bathroom renovation costs following a leak that revealed that the entire bathroom floor and shower walls had not been properly waterproofed when the place was initially built (cca 2009).
I purchased the property in 2014 and rented it out for several years, until about 2020. I then moved in with my wife and son and we lived there until early 2022. In April 2022, I took up a 5-year contract to work overseas and we decided to leave Australia and rent out the property again. My wife was to rent the place out and join me in June 2022, but in May 2022 she discovered a big leak from the bathroom in the garage below. We thought it would only require us to replace a few tiles in the shower, but the tiler looked at it and discovered that the entire underfloor and wet walls in both bathrooms were moldy and disintegrating from what must have been years of water damage under the tiles. We were quoted $30K to replace the wet areas, floors, showers, shower walls, spa etc, but we could not find the same tiles, so we decided to replace everything, which cost us $40K for both bathrooms. The property had been previously rented out as a premium property at around $800-1000 pw, so to get that same income, the fittings needed to be appropriate for that level of appointments, rather than having different tiles and fittings in different corners of the bathroom.
In any event, the place could not be rented out at all until the bathrooms were fixed (which was causing a 4kpcm loss in interest payments and foregone income), and also my wife had to fly back to Australia in October 2022 to facilitate the bathroom renovation process (is that deductible?). We finally completed the replacement of the bathroom and rented the place out in March 2023 (instead of June 2022) and it has been tenanted since then at $1000pw. I have received professional advice that I am considered a foreign tax resident, as I am permanently away from Australia, but still need to lodge tax return for all of my rental properties as such. I should note that when I purchased this property, I obtained a depreciation schedule.
Please advise how I can best claim the bathroom renovation/repair costs, which were incurred in FY2022-23. I have approximately 20K net income from other investment properties in 2022-23, and from next year should have about 50K net income together with this property, so preferably I would like to use this $40K loss to offset that in this year and next few years if possible. My tax agent thought it can be fully deducted this year, as the place could not have been rented out at all without full replacement in the circumstances, but I am not so sure, having looked at some online resources and wanted to get a second opinion from you. Thank you
Answer
I totally agree with you, sorry, not deductible. The key ruling on this stuff is TR 97/3 https://www.ato.gov.au/law/view/document?DocID=TXD/TD973/NAT/ATO/00001
It is not even a repair anyway, it is an improvement because the building had the fault when you purchased it. Let alone the fact it was incurred before the house became available for rent.
The best you can do is claim the cost over 40 years under Division 43 special building write off, still that is $1,000 a year deduction.
Travel to an investment property for Mum and Dad investors is no longer tax deductible.
The depreciation schedule you got back when you first rented it should still be good if the time has not run out. You will not, this time, be entitled to claim and plant and equipment depreciation but the Div 43 special building write off in the report would still apply. You can only claim depreciation on plant and equipment you buy brand new for the property after you move out. Plant and equipment is stoves, carpets, air conditioners etc.
You will need to look at the depreciation schedule to see if the Div 43, capital works, amount is broken down enough to single out the bathroom portion. If not then you are going to have to consult a quantity surveyor again. Once you ascertain the original value for the bathrooms in the total Div 43 amount you will have to remove it. You can only claim the Div 43 in the depreciation schedule that relates to the rest of the house not the bathrooms, but of course you get to depreciation the new bathroom costs. You may have heard of scrapping, where the portion of the original building removed becomes deductible. Unfortunately, having previously lived in the house will catch you out here again, sorry no deduction. ID 2010/35 https://www.ato.gov.au/law/view/document?docid=AID/AID201035/00001 states:
Decision
No. The use requirement under paragraph 43-40(1)(c) of the ITAA 1997 is not satisfied, in respect of a vacant house that was demolished, if before it was vacated, the house was used for private accommodation for a period since it was last used for the purpose of producing assessable income. A deduction is not available under section 43-40 of the ITAA 1997 for the undeducted construction expenditure for the house when the house is demolished.
As a non resident you will still be required to lodge tax returns in Australia for the rental income you receive on any Australian properties. You will not be entitled to a tax free threshold. You might want to consider contributing $27,500 a year to superannuation. As long as you have an Australian super fund before you leave you can claim a tax deduction for contributions you make to that fund, up to your concessional cap. This will help take the tax bracket on some of that income down to just 15%. You are allowed to claim $27,500 in concessional contributions per year. If your superannuation balance is under $500,000 in the year before you make the contribution and you have not used up all your concessional contributions cap in previous years you can go back as far as 5 years and utilise that unused cap. https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/contributions-and-rollovers/contribution-caps
Is the property in joint names? You might get two concessional caps.
You are probably already aware that you must not sell that house while you are living overseas or you will lose all your main residence exemption on it. You won’t even be allowed to use the 6 year rule. Yet the 6 year rule can apply to your time overseas as long as you wait until you come back here to live before you sell. You need to come back to live ie leave your overseas job. You cannot just come back here and sell while on holliday.
