ATO Interpretative Decision
ATO ID 2002/919
Income Tax
Deductibility of Bond for Rental PremisesFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer entitled to claim a deduction for a bond paid for premises leased for use in their business under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997')?
Decision
No. The expense incurred in paying the bond is of a capital nature and not deductible in accordance with paragraph 8-1(2)(a) of the ITAA 1997.
Facts
The taxpayer operates a business activity from rented premises. In order to secure the lease on the rented premises, the taxpayer was required to pay a bond to the owner of the premises.
The payment of the bond gives the taxpayer the right to use the premises for their business activity until the lease expires. Upon expiry of the lease, the bond will be refunded to the taxpayer if the premises are left in good condition and there are no rent payments outstanding.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
The payment of a bond in relation to the lease of premises to be used for business purposes is clearly incurred in producing the assessable income of that business, but the outgoing may be capital in nature.
The taxpayer was required to pay the bond in order to obtain access to the property for the period of the lease. The bond is a form of security which ensures the property is able to used by the taxpayer until the lease expires. Therefore, the payment of the bond provides an enduring benefit which allows the conduct of the taxpayer's business activity from the premises for a specified period of time. The payment does not relate to the daily activities of the business.
Accordingly, the bond is capital in nature and not deductible in accordance with paragraph 8-1(2)(a) of the ITAA 1997.
Date of decision: 16 August 2002Year of income: Year ending 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 8-1
paragraph 8-1(2)(a)
Keywords
Deductions & Expenses
Rental expenses
Date reviewed: 2 March 2017
ISSN: 1445-2782