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Ruling
Subject: investment property bond fee
Question
Is your share of the deposit bond fee that you have paid to secure the purchase of a residential investment property a capital expense?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commenced on
1 July 2010
Relevant facts
You and your spouse have each paid a share of a deposit bond to secure the purchase of a share of a residential investment property.
The purchase is for an off the plan property, and settlement is anticipated to be in the next twelve months.
At settlement you and your spouse will have to pay the full purchase price, which includes the traditional deposit and balance.
If settlement occurs ahead of time a percentage of the deposit bond fee may be refunded at the provider's discretion.
The deposit bond fee is calculated from the amount required and the duration it is required for.
The deposit bond amount has not been borrowed.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (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.
Generally the costs associated with the purchase of a property for income producing purposes are not deductible under section 8-1 of the ITAA 1997, as the expenses are incurred in establishing the profit-making asset and are capital in nature. For example, a deposit bond fee may be paid to protect the vendor of the property in the event the buyer does not pay the deposit on the property.
In your case, you have paid a deposit to secure your right to purchase a rental property that is to be used for income producing purposes.
The deposit bond is a capital expense associated with the acquisition of an income producing property and therefore is not tax deductible.
As a capital expense the amount of the deposit bond fee will be added to the cost base of the property for capital gains tax purposes and is used to calculate the capital gain or loss arising on disposal of the property.
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