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Edited version of your written advice
Authorisation Number: 1012804717199
Ruling
Subject: Rental property expenses - management fees
Question 1
Are you entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the management fees incurred in the construction of a rental property?
Answer
No.
Question 2
Are you entitled to claim a deduction under section 43-10 of the ITAA 1997 for the management fees incurred in relation to the construction of a rental property?
Answer
Yes.
Question 3
Are you entitled to claim a deduction under section 8-1 of the ITAA 1997 for the management fees incurred in relation to procuring a tenant for a rental property?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You purchased a property "off the plan" with the view to it being an income producing property.
You incurred a management fee. The management fee is paid for:
• managing the builders
• ensuring each stage of the build is delivered on time and to correct quality standards
• manage payments and disputes
• arrange quantity surveying
• arrange for a property manager and interview first tenant, and
• bring the asset to an income producing condition.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 43-10
Income Tax Assessment Act 1997 section 43-20
Income Tax Assessment Act 1997 section 43-70
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, or relate to the earning of exempt income.
Generally, expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction. Deductions of construction expenditure on a rental property however are considered capital, and are therefore not deductible under section 8-1 of the ITAA 1997.
Section 43-70 of the ITAA 1997 defines 'construction expenditure' as capital expenditure in respect of the construction of capital works. Taxation Ruling TR 97/25 deals with the operation of Division 43 and provides at paragraph 9 that construction expenditure includes preliminary expenses such as architect fees, engineering fees, foundation excavation expenses and costs of building permits. These expenses are accepted as being in respect of the construction of capital works.
In your case, you have been charged a management fee. The management fee covers the following functions:
• Manage the builders
• Ensure each stage of the build is delivered on time and to a correct quality standard
• Manage payments and disputes
• Arrange quantity surveying
• Arrange a property manager
• Interview the first tenants; and
• Bring the asset to an income producing condition.
The proportion of the management fees relating to the obtaining of a property manager and interviewing the first tenant are seen to be directly related to the production of assessable income and are therefore deductible under section 8-1 of the ITAA 1997.
The remainder of the tasks the manager are required to perform however are considered to be similar in character to those costs accepted as preliminary expenses forming part of the construction expenditure. The management service is an integral part of your investment property project and is sufficiently related to the actual construction of the building itself as to form part of the construction expenditure. The bulk of the management fees are not seen to be incurred in the production of assessable rental income, but as part of the construction of the rental property.
You will need to apportion the management fees between those relating to the procurement of a tenant, which are immediately deductible, and those relating to the construction of the rental property.
Capital works deductions
Section 43-10 of the ITAA 1997 provides a deduction of an amount for capital works in respect of certain 'construction expenditure' incurred in respect of the construction of capital works.
Section 43-20 of the ITAA 1997 recognises three categories of capital works:
• buildings or extensions, alterations or improvements to buildings;
• structural improvements or extensions, alterations or improvements to structural improvements; and
• environment protection earthworks.
The building of the investment property and the associated management fees qualify as capital works under section 43-20 of the ITAA 1997.
Consequently, you are entitled to a deduction of 2.5% of the total capital works and associated management fees under section 43-10 of the ITAA 1997.
Please note that capital works deductions can only be claimed once construction has been completed.
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