ATO Interpretative Decision

ATO ID 2003/113 (Withdrawn)

general

• This ATO ID is withdrawn. Guidance relating to the issue addressed in this ATO ID can be found in the Rental Property Guide (NAT 1729) published to ato.gov.au (QC 23626).
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for fees paid for a bank guarantee used in lieu of a deposit for the purchase of an investment property?

Decision

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for fees paid for a bank guarantee used in lieu of a deposit for the purchase of an investment property as the expenses are a capital in nature.

Facts

The taxpayer entered into a contract with a developer to purchase a property that was being constructed. The taxpayer intended to use the property for income producing-purposes.

The taxpayer applied for a bank guarantee for the deposit amount to secure their rights to purchase the property. The taxpayer's bank subsequently issued a bank guarantee to the developer for the deposit amount.

The taxpayer paid a fee to the bank every 6 months while the bank guarantee was in place.

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 courts have considered a number of cases involving issues related to capital and revenue expenditure. In Associated Newspapers Ltd & Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403, Dixon J considered the issue of what constitutes a capital outgoing and stated that:

expenditure and outlay upon establishing, replacing and enlarging the profit yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue.

When expenses are paid on a recurring basis, they are often of a revenue nature. However, in Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219; [1981] FCA 9; 81 ATC 4100; (1981) 11 ATR 484, Deane and Sheppard JJ stated that the recurring nature of guarantee fees paid by a debtor to a guarantor:

would not, as a matter of necessity, preclude their being characterised as outgoings of capital if other relevant factors were, on the assessment of all relevant considerations, found to warrant that conclusion.

The bank guarantee fees were paid by the taxpayer to secure the right to purchase a property that was being constructed for future income-producing purposes. Therefore, the bank guarantee fees are capital expenses associated with the acquisition of the income-producing property and are not deductible revenue outgoings incurred in deriving rental income from the property. The recurring basis of the payments is not a sufficient factor to alter the capital nature of the expenditure.

This can be distinguished from a loan to finance the payment of a deposit. Although a deposit serves a similar purpose to the bank guarantee, that is to secure the right to purchase the property, it also is a partial payment of the purchase price. It is for this second reason that the interest payable under a loan in relation to a deposit may be a deductible expense.

In addition, the fees cannot be considered to be borrowing costs as there is no 'borrowing' for the purposes of section 25-25 of the ITAA 1997.

Accordingly, the bank guarantee fees paid by the taxpayer are capital expenses and are not deductible under section 8-1 of the ITAA 1997.

Amendment History

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 8-1
   section 25-25
   section 110-25
   section 110-25(2)

Case References:
Associated Newspapers Ltd & Sun Newspapers Ltd v. Federal Commissioner of Taxation
   (1938) 61 CLR 337
   [1938] HCA 73
   (1938) 5 ATD 87
   1AITR403

Business Line:  Individuals

Date of publication:  15 March 2003

ISSN: 1445-2782