Edited version of private ruling

Authorisation Number: 1011608073642

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Ruling

Subject: Deduction - property acquisition service fee.

1. Are you entitled to a deduction for any of the fees paid to a property agent?

No.

2. Do the fees paid to property agent form part of the second element of the cost base of the property purchased?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You were seeking to purchase an investment property.

You engaged the service of property agent to assist in the search for a unit and to negotiate a purchase price.

You paid fees to property agent for the search and negotiation for the purchase a property.

You intend to rent the property to receive rental income.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 subsection 110-25(3).

Income Tax Assessment Act 1997 section 110-35.

Income Tax Assessment Act 1997 subsection 110-35(2).

Reasons for decision

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital, private or domestic in nature or relates to the earning of exempt income (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)). 

The courts have considered the meaning of incurred in gaining or producing assessable income. In Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236 the High Court stated that: 

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be relevant and incidental to that end. The words incurred in gaining or producing the assessable income mean in the course of producing such income.

The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible (FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

Expenditure incurred in servicing or managing income producing investments (such as ongoing management fees or annual retainers) has a sufficient connection with gaining or producing assessable income and is deductible to the extent that it relates to the gaining or producing of that income (Taxation Ruling IT 39).

Where part of the expense covers other matters or relates to investments that do not produce assessable income, only a proportion of the fee is deductible. For example, an investment advisor may suggest that a taxpayer makes changes to the mix of investments held (without investing additional capital). This type of advice would normally be part and parcel of managing a taxpayers existing investment portfolio and the expenses incurred for this advice would generally be tax deductible.

Taxation Determination TD 95/60 provides that expenses associated with putting income producing investments in place (such as drawing up an investment plan) are incurred at a point too early in time to be a part of the income producing process. The expenditure is not considered to have been incurred in producing income from the investments. Rather, the expenditure is associated with the making of the investment. The expenditure is capital in nature and, therefore, not deductible under section 8-1 of the ITAA 1997.

In your case, you incurred expenses for the services of a property agent. The expenses incurred for their services did not relate to servicing or managing income producing investments already in place and were incurred too early in time to be considered part of the income producing process. The expenses were not actually incurred in earning income from the investment property; rather, the expenses were associated with putting the investment in place. It was only after incurring the expenses that you and your spouse was in a position to produce income from the investment property. The expenses are considered capital in nature and are not deductible under section 8-1 of the ITAA 1997.

Capital gains tax (CGT)

The cost base of a CGT asset is made up of five elements. The second element of the cost base of a CGT asset is the incidental costs you incurred (subsection 110-25(3) of the ITAA 1997).

Incidental costs that can be included in the cost base of a CGT asset are set out in section 110-35 of the ITAA 1997. They are costs you may have incurred to acquire a CGT asset or that relate to a CGT event. Subsection 110-35(2) of the ITAA 1997 lists remuneration for the services of a consultant as an incidental cost.

The expenditure incurred for the services of property agent constitutes remuneration for the services of a consultant for the purposes of subsection 110-35(2) of the ITAA 1997. As such, the expenses will form part of the second element of the cost base of the investment property in accordance with subsection 110-25(3) of the ITAA 1997.

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