Edited version of private ruling

Authorisation Number: 1011408152095

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Ruling

Subject: Arrears of Land Tax and Rates are tax deductible in the year they are paid or in the years to which the assessments relate

Questions

1. Are the arrears of Land Tax and Rates tax deductible under section 8-1 (Income tax Assessment Act 1997(ITAA 1997) in the years to which the land tax and rates assessments relate?

Answer: Yes

2. Can the taxpayer's tax returns be amended for the 2007, 2008 and 2009 years to claim the land tax and rates arrears?

Answer: Yes

This ruling applies for the following period/s:

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30June 2009

The scheme commences on:

21 January 2010

Relevant facts and circumstances

In 2006 the taxpayers purchased a block of land in Canberra from the ACT government on which the taxpayers constructed a commercial building.

The said building is used for income producing purposes by way of deriving rental income.

The ACT government did not issue the taxpayers with Land Tax or Rates assessments for the years ended 30 June 2007, 30 June 2008, 30 June 2009 or the 6 month period up to 31 December 2009 at the usual time.

On the 21/1/2010 and on 19/2/2010 respectively the taxpayers were issued with rates assessments and land tax assessments for the years ended 30 June 2007, 30 June 2008, 30 June 2009 and the 9 month period ended 31/3/2010.

All land tax and rate notices were required to be paid on the 15/3/2010. No penalties or interest was imposed.

Reasons for decision

Question 1

Are the arrears of Land Tax and Rates tax deductible under section 8-1 (Income tax Assessment Act 1997(ITAA 1997) in the years to which the land tax and rates assessments relate?

Summary

The arrears of land tax and rates are deductible in the year to which the land tax and rates relates as this is when the expenses have been incurred.

Detailed reasoning

An expense is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) if and to the extent to which it is incurred in gaining or producing the assessable income or in carrying on a business for that purpose. This section provides that:

8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income; or

(d) a provision of this Act prevents you from deducting it.

[* The asterisked terms are defined in section 995-1 of ITAA 1997.]

The rulings referred to and cases cited in this submission consider deductibility under subsection 51(1) of ITAA 1936. The views expressed in the rulings and the decisions made in these cases have equal application to section 8-1 of ITAA 1997. Therefore, all references to subsection 51(1) should be taken as including a reference to section 8-1.

Land Tax and Council Rates

Land tax and Council Rates incurred in respect of land or premises used for business or income producing purposes are deductible under sec 8-1 of ITAA 1997. In Moffatt v Webb (1913) 16 CLR 120 land tax incurred by a grazier was held to be deductible as an outgoing wholly and exclusively incurred and expended for the taxpayer's trade as a grazier. Land tax incurred prior to 30 June 1997 might have also been deductible under sec 72 of ITAA 1936 but of course, they could not have been deducted twice, (sec 82(1) of ITAA 1936).

A property owner's liability to land tax and council rates is imposed automatically by operation of the Land Tax Assessment Act if the property owner has satisfied the Act's requirements for its imposition, i.e. using his property for income producing purposes at a certain point in time. As land tax is imposed by virtue of the operation of the legislation, the liability is ascertainable at this point.

In a recent decision of the Full Federal Court, Layala Enterprises Pty Ltd (in liq) 98 ATC 4858, when considering the WA pay-roll tax legislation, it was held that the pay-roll tax was incurred within the meaning of subsection 51(1) of ITAA 1936 when it was ascertainable and capable of calculation.

The fact that the liability may be ignored for a number of years does not alter the position that the liability was incurred in the year to which the assessment relates, not in a later year when an assessment may be issued.

The same conclusion was reached by the Board of Review in Case B5 70 ATC 24 involving the deductibility of land tax. In that case the taxpayer was liable for land tax as an owner of land. Land tax in New South Wales is levied in respect of all land owned on a particular date each year. It was held that land tax was incurred within sec 51(1) of the ITAA 1936 on that date rather than when the taxpayer received the land tax assessment or notice of liability as lessee.

Question 2

Can the taxpayer's tax returns be amended for the 2007, 2008 and 2009 years to claim the land tax and rates arrears?

Summary

The taxpayer is entitled to amend their 2007, 2008 and 2009 income tax returns as the land tax and rates have been incurred and the request for amendment was received within the time period for allowed to amend the assessments.

Detailed Reasoning

The 2007, 2008 and 2009 years land tax and rates arrears can be amended. Taxation Ruling TR 97/7 sets out the views of the Australian Taxation Office on the meaning of the word 'incurred' in subsection 51(1) of the ITAA 1936 which is consistent with the cases mentioned above. Paragraph 6 provides that:

'(a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. It must be a presently existing liability to pay a pecuniary sum. ……'

There are no provisions in the Income Tax Assessment Act for claiming the outgoings where the outgoings are in respect of a previous year of income. The correct treatment is to amend the previous years' tax returns to which the outgoings relate. Paragraph 14 of TR 97/7 provides that:

'If taxpayers now want to claim deductible outgoings incurred but not claimed in a previous year, they can seek amendments(s) of their assessment(s), subject to the four year limitation set by subsection 170(3).'…..

Accordingly, the arrears of land tax are deductible in the year that the liability to land tax is incurred and not in the year that the assessment is raised.

As stated the taxpayer can request for amendment of assessments to allow deductions for arrears of land tax and Council rates in their correct income tax years. The period in which the taxpayer can request an amendment of an assessment is limited to four years, from the due date for payment of the tax under the assessment; 170(3) of ITAA 1936.

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