One in seven taxpayers in Australia is a property investor. Each year residential landlords claim a total of around $5 billion in rental losses. Accordingly one can understand the Australian Tax Office’s (ATO) close scrutiny of the deductions claimed by landlords. But a recent case before the Administrative Appeals Tribunal (AAT) demonstrates how far the ATO will go to test the boundaries of what is, and isn’t, tax deductible.

The case involved a taxpayer who owned a property in country NSW. The owner stated that the property was available for rent but she had been unable to find tenants. As a result, the property did not derive any income for a number of years.

The owners had incurred the costs of interest on the property loan, maintenance costs, and rates, which they claimed as a deduction. However the Tax Commissioner had a different view and denied the deductions treating them as being of a private or capital nature.

The central issue was whether the property was genuinely available for rent. If it was not available for rent then the expenses incurred by the taxpayer were not deductible. If the property was available for rent, then the expenses were deductible. This is because you must show that the expenses were incurred in gaining or producing income, even if no income was actually produced in that income year.

What’s interesting in this case is how far the ATO will go. The ATO used electricity and telephone records to argue that the taxpayer had been living in the property and that it was not genuinely available for rent. Fortunately for the taxpayer, the AAT accepted that she had only lived in the property while carrying out repairs and maintenance work.

So, even if a property is not deriving rental income during the relevant income year, taxpayers may still be entitled to deductions for interest expenses, council and water rates and other holding costs. The key issue is whether the property is genuinely available for rent and whether continuing efforts are being made to improve the property to attract renters.