ATO Interpretative Decision

ATO ID 2006/154 (Withdrawn)

Income Tax

• This ATO ID is withdrawn due to the legislative change to subsection 110-35(5) of the Income Tax Assessment Act 1997 as a consequence of Act 32 of 2006 with effect from 6 April 2006 and applicable to events happening on or after 1 July 2005.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can a taxpayer who sold a rental property include the costs of hiring furniture and ornaments used in marketing the property as part of the cost base of the property, as an incidental cost under subsection 110-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The costs of hiring furniture and ornaments can be included as part of the cost base of the rental property under the second element of cost base in subsection 110-25(3) of the ITAA 1997, as a cost of advertising to find a buyer (paragraph 110-35(5)(b) of the ITAA 1997), where the expenditure is directed at demonstrating, displaying, exhibiting or featuring the saleable qualities of the property for sale.

Facts

The taxpayer owned a rental property, which they decided to sell after the tenants vacated the premises.

The taxpayer hired furniture and ornaments as part of their marketing strategy to sell the property by displaying to greatest advantage the saleable qualities of the property.

The rental property was sold in April 2003. The taxpayer wished to include the costs of hiring the furniture and ornaments as part of the cost base of the rental property.

Reasons for Decision

Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset consists of five elements. The second element of the cost base is the incidental costs that the taxpayer incurs in acquiring the CGT asset or which relate to a CGT event that happens in relation to the CGT asset (subsection 110-25(3) of the ITAA 1997).

Section 110-35 of the ITAA 1997 sets out the five types of incidental costs that can be included in the cost base of a CGT asset. These include 'costs of advertising to find a buyer' (paragraph 110-35(5)(b) of the ITAA 1997).

The Macquarie Dictionary, 2001, rev. 3^rd edn, The Macquarie Library Pty Ltd, NSW defines 'find' to include

2. to learn, attain, or obtain by search or effort.

and 'advertise' as

1. to give information to the public concerning; make public announcement of, by publication in periodicals, by printed posters, by broadcasting over the radio, television, etc.: to advertise a reward. 2. to praise the good qualities of, in order to induce the public to buy or invest in. 3. to offer (an article) for sale or (a vacancy) to applicants, etc., by placing an advertisement in a newspaper, magazine, etc.: she advertised the post of private secretary. [ 4. and 5. are archaic and obsolete respectively] 6. to place an advertisement in a newspaper, magazine, etc.: to advertise for a house to rent.

While the meaning of 'advertising' is defined as

1. the act or practice of bringing anything, as one's wants or one's business, into public notice, especially by paid announcements in periodicals, on hoardings, etc., or on television: to secure customers by advertising. 2 . paid announcements; advertisements. 3. the profession of designing and writing advertisements.

The Australian Concise Oxford Dictionary, 2004, 4^th edn, Oxford University Press, Melbourne defines 'find' as

1a. discover by chance or effort (found a key). b. become aware of

and defines 'advertise' as

1. draw attention to or describe favourably (goods or services) in a public medium to promote sales. 2. make generally or publicly known 3. seek by public notice, esp. in a newspaper. 4 . notify.

and 'advertisement' as

1a . a public notice or announcement, esp. one advertising goods or services in newspapers, on posters, or in broadcasts. b. .a person or thing regarded as a means of conveying the merits or demerits of something (he's a good advertisement for a healthy lifestyle).

Therefore, consistently with the ordinary meaning of the words 'find' and 'advertise', the advertising costs must be to obtain a buyer by search or effort or by discovery - especially by paid announcements. However, arguably, the meaning of advertising can extend more broadly.

In Burton's Legal Thesaurus 3^rd edn the word 'advertise' is defined to include the following meanings:

... advise, announce, apprise, attract, broadcast, ... describe, ... exhibit, expose, feature, flourish, focus the attention ...

In Re Wescorp Livestock International Ltd and Australian Trade Commission (1993) 30 ALD 131 (Wescorp Case), concerning export development grants, it was said that

The essential feature of advertising or soliciting is communication of something thought likely to induce another to purchase goods which one wishes to sell. The dictionary meanings most apt in the context are 'to entreat or petition a person for, to urge or importune, or to draw on or allure by some specious representation or argument' (per Shorter Oxford Dictionary).

While the Wescorp Case reasoning focussed on communication, in the customs decision of Re Renault (Australia) Pty Ltd and Bureau of Customs (1977) 1 ALD 19 it was considered that advertising could include matters as diverse as brochures, promotional displays and exhibitions.

There is doubt whether the hiring of furniture for the purpose of influencing a prospective buyer's decision to buy, constitutes 'costs of advertising to find a buyer' within the ordinary and generally understood meaning of the words 'advertise' and 'find'. In this regard, it is noted that it has been thought necessary to include a technical amendment in Taxation Laws Amendment (2006 Measure No.1) Act 2006 and a specific example in paragraph 2.136 of the related Explanatory Memorandum to put the matter beyond doubt.

Nevertheless, we recognize that there have been emerging trends in real estate practise to promote the marketing advantages of such expenditure. On balance, we accept that, it is now arguable that the hiring of furniture can be regarded as a 'cost of advertising to find a buyer' where the purpose of the expenditure is to find a buyer by demonstrating, displaying, exhibiting or featuring the saleable qualities of the property. For example, furniture can be used to demonstrate the good qualities of the property (for example, the size of the rooms) or to show that the less-desirable qualities of the property can be managed in a practical or pleasing manner.

Year of income:  Year ended 30 June 2006

Legislative References:
Income Tax Assessment Act 1997
   section 110-25
   section 110-25(3)
   section 110-35
   paragraph 110-35(5)(b)

Case References:
Re Wescorp Livestock International Ltd and Australian Trade Commission
   (1993) 30 ALD 131

ATO Interpretative Decisions overturned by this decision
ATO ID 2003/668

Other References:
The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW
The Australian Concise Oxford Dictionary, 2004, 4th edn, Oxford University Press, Melbourne
Burton's Legal Thesaurus 3rd edn

Keywords
Capital gains tax
CGT assets
CGT cost base

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  23 June 2006

ISSN: 1445-2782