Tax adviser successful in arguing for $140k rental repair deduction after ATO audit

In August 2022, a Canberra rental property was rendered uninhabitable after its roof began to leak, a problem that worsened every time it rained.

When builders checked the roof, they found that the leakage had caused extensive damage to the roof’s wooden pillars.

The property’s owners, Sydney-based ‘mum and dad’ investors, spent nine months and $138,000 getting the roof repaired, due to a lack of available builders in Canberra.

Despite the eye-watering cost, Manu Gupta, principal partner at tax advisory firm M G Arthur & Associates, successfully argued that the couple’s expenditure counted as repairs and not capital under complex rental deduction laws.

Under rental deduction rules, repairs and general maintenance expenditures can be fully claimed on tax in the year the expense occurred. In contrast, capital works, including repairs to an ‘entirety,’ could be claimed to a much lesser extent.

Gupta said there was a common misconception wherein large expenditures were automatically seen as capital expenses, and therefore not tax-deductible.

“I think where the tax accountants struggle, because of the complexity of the law, is whether [expenditure is] repair or capital, and the moment there's a big dollar value, the first perception is it has to be capital,” Gupta said.

“Despite the high value of expense, we were comfortable that it should be repaired because the property was being brought to its original condition with no additional value.”

Gupta knew that an ATO audit would be extremely likely once the couple submitted their tax return. However, confident that the expenditure was a repair, he prepared a reasonable arguable position with tax adviser Max Hendriks.

As expected, the ATO audited the client and initially denied the deductions. The ATO argued that because some of the roof’s wooden beams had been supported by steel bars in the repair, it had extended the life of the property.

Gupta persisted with an objection, arguing that only the rotten wooden beams had been supported with steel beams, and therefore did not enhance the life of the property beyond repairing the water damage.

Following the objection, after careful deliberation, the ATO accepted the deductions in full.

Reflecting on the success, Gupta noted that rental deductions were a complex area, and encouraged other tax agents to seek a second opinion when advising clients on complicated tax matters.

“We need to educate clients that tax law is a very complex area, where from time to time, we will need to reach out to experts and spend some money,” Gupta said.

“Where we are not strongly comfortable with the position being taken, we need to reach out to the experts and get their opinion before we represent our client.”