ATO Interpretative Decision
ATO ID 2012/36
Income Tax
Lease Document Expenses: deductibility when a property used partly for the production of assessable incomeFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
In the context of subsection 25-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997), does the phrase 'will use' refer to intention at the time the relevant outgoing is incurred?
Decision
No. In the context of subsection 25-20(2) of the ITAA 1997 the phrase 'will use' is a reference to actual use of the property.
Facts
The taxpayer acquired the leasehold of a residential property during the income year and incurred stamp duty on transfer.
The property was tenanted for three months to a third party after which time the tenants vacated the premises and the taxpayer took up residence for the balance of the income year.
Reason for Decision
Subsection 25-20(1) of the ITAA 1997 provides that a deduction is allowable for the cost of preparing, registering or stamping a lease of property or an assignment or surrender of a lease of property, where the property has been or will be used solely for the purposes of producing assessable income.
Further, under subsection 25-20(2) of the ITAA 1997, a portion of the lease expenditure is an allowable deduction if the leasehold property is or was used partly for income producing purposes in the income year. Subsection 25-20(2) of the ITAA 1997 provides:
Property used partly for that purpose
If you have used, or will use, the leased property only partly for that purpose, you can deduct the expenditure to the extent that you have used, or will use, the leased property for that purpose.
The proper construction of this subsection turns on what is meant by the phrase 'will use'. However, neither the phrase 'will use', nor its constituent words, are defined and therefore adopt their ordinary meaning in the legislative context in which they occur.
The context of section 25-20 of the ITAA 1997 is to provide a deduction for certain lease document expenses to the extent the leased property is used for income producing purposes. The context is one concerning use and requiring apportionment in cases where usage is not entirely for income producing purposes. A construction which makes subsection 25-20(1) of the ITAA 1997 redundant in some instances of non-income producing use is at odds with this scheme of section 25-20 of the ITAA 1997.
The Macquarie Dictionary 2005, 4th edition, The Macquarie Library Pty Ltd meaning of 'use' in context means:
to employ for some purpose, put into service, turn to account.
However, the ordinary meaning of the verb 'will' varies depending on usage. In the current context, the word, 'will' places a future tense on the word 'use' such that the compound expression 'will use' is concerned with future use as opposed to a likelihood or resolve concerning use at the point in time the relevant outgoing is incurred. A similar construction was favoured in Rayfield v. Hands [1958] 2 All ER at 196 in which it was held the operation of the word 'will' on 'take' in the context there under consideration meant 'resultant prospective eventuality'.
It would be an incongruous outcome were a deduction available merely by reference to intention at the time an outgoing is incurred. If that were the test, a change in intention immediately following incurrence would entitle a deduction even though the property was never put to an income producing use.
Therefore, in circumstances where there is a change in use following acquisition part way through the income year, such that the premises are not wholly used for income producing purposes, an apportionment of the stamp duty outgoing which is reasonable in the circumstances is required under subsection 25-20(2) of the ITAA 1997.
Date of decision: 1 May 2012Year of income: Year ending 30 June 2012
Legislative References:
Income Tax Assessment Act 1997
section 25-20
subsection 25-20(1)
subsection 25-20(2)
Case References:
Rayfield v Hands
[1958] 2 All ER 194
ATO ID 2002/245
Keywords
Deductions & expenses
Lease & hire expenses
Other references
The Macquarie Dictionary, 2005, 4th edition, The Macquarie Library Pty Ltd, NSW
Date reviewed: 28 October 2016
ISSN: 1445-2782