Edited version of private advice

Authorisation Number: 1052105883083

Date of advice: 6 April 2023

Ruling

Subject: Deduction for stamp duty

Question 1

Is the Taxpayer entitled to a deduction under subsection 25-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year ended 30 June 20XX for the whole of the transfer duty paid on the purchase of the Property which is subject to a 99-year lease?

Answer

No.

Question 2

If the answer to question 1 is no, will the Taxpayer be entitled to deduct a portion of the transfer duty paid on purchase of the Property in the income year ended 30 June 20XX under subsection 25-20(2) of the ITAA 1997?

Answer

Yes.

Question 3

If it is determined in the future that the deduction claimed for transfer duty under section 25-20 by the Taxpayer based on past use and the anticipated future holding period and use is greater than the deduction that could have been claimed based on the actual future holding period and/or use, is there a balancing adjustment or clawback of any portion tax deduction in the year ended 30 June 20XX?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.    The Taxpayer purchased the Property subject to an existing tenancy agreement.

2.         The Property is subject to a 99-year lease ending on Date X.

3.         There is a 99-year lease in relation to the land on which the strata development is built, between XXX and XXX, which lease terminates on Date X.

4.         On Date X the Strata Plan was registered under Strata Schemes (Leasehold Development) Act 1986 No 219 (NSW).

5.         On the date of settlement of the Taxpayer's purchase of the Property and transfer of title in the Property on Date X, the Taxpayer as purchaser became liable to pay transfer duty of $XXX, which was paid on the same date or shortly thereafter.

6.         At the time the Taxpayer purchased the Property, it was tenanted under a residential lease agreement between the tenants and the previous owner of the Property. Those tenants vacated the Property when the lease expired on Date X.

7.         The Taxpayer then moved into the Property, and between Date X and Date X the Property was The Taxpayer's primary place of residence.

8.         The Taxpayer vacated the Property on Date X and on Date X the Property became available for rent.

9.         On Date X the Taxpayer entered into a 2-year lease agreement with a tenant in relation to the Property.

10.      In respect of the income tax return lodged by the Taxpayer on Date X for the year ended 30 June 20XX, they have not claimed any amount in respect of the transfer duty of $XXX as an income tax deduction.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-20

Income Tax Assessment Act 1997 subsection 25-20(1)

Income Tax Assessment Act 1997 paragraph 25-20(1)(b)

Income Tax Assessment Act 1997 subsection 25-20(2)

Reasons for decision

Issue 1

Question 1

Is the Taxpayer entitled to a deduction under subsection 25-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year ended 30 June 2021 for the whole of the transfer duty paid on the purchase of the Property which is subject to a 99-year lease?

Summary

No. Under Section 25-20(1) of the ITAA 1997 a deduction may be claimed for expenditure incurred on an assignment of a lease of property if you have used or will use the property solely for the purpose of producing assessable income. The transfer duty paid on the assignment of the lease is not deductible because the Taxpayer used the Property for both producing assessable income and for non-income producing purposes.

Detailed reasoning

1.         Subsection 25-20(1) states:

You can deduct expenditure you incur for preparing, registering or stamping:

(c)         a lease of property; or

(d)         an assignment or surrender of a lease of property;

if you have used or will use the property solely for the purpose of producing assessable income.

Expense incurred on transfer duty on a lease or an assignment of a lease of property

2.         It is necessary to determine whether the transfer duty has been incurred in leasing a property or in assigning a lease of property in accordance with subsection 25-20(1) of the ITAA 1997.

3.         Although the term 'lease' is not defined in the taxation legislation, the general law requirement is that a lease must be granted for a definite period. A long-term lease is a 'lease' for the purposes of section 25-20, as it is for a determinate period of 99 years.

4.         On Date X the Strata Plan was registered under Strata Schemes (Leasehold Development) Act 1986 No 219 (NSW) and the underlying lease between the XXX and XXX terminates on Date X.

5.         The Property is part of a leasehold strata plan under the NSW strata law for leasehold developments.

6.         On Date X the Taxpayer purchased the Property, acquiring a strata lot with title in the form of a leasehold estate.

7.         In accordance with paragraph 25-20(1)(b) of the ITAA 1997, transfer duty which is incurred in respect of the assignment of a lease of property is deductible. In this case, the Contract for the Sale and Purchase of Land executed by the Taxpayer is considered to be an assignment of the lease and the form of title being transferred is that of a leasehold estate.

Have used or will use the property solely for the purpose of producing assessable income

8.         The Property's history of use shows that there has been use of the Property for private purposes and for the purpose of producing assessable income.

9.         In the year which transfer duty was incurred, being the year ended 30 June 20XX, the Property was solely used for income producing purposes. The Property was the Taxpayer's main residence from Date X to Date X.

10.      Thus the requirement in subsection 25-20(1) that you 'have used or will use' the Property solely for income producing purposes is not satisfied.

Conclusion subsection 25-20(1)

11.      As at Date X the Property had been used for a purpose other than the production of assessable income, the requirements of subsection 25-20(1) cannot be satisfied by the Taxpayer in the year ended 30 June 20XX.

Question 2

If the answer to question 1 is no, will the Taxpayer be entitled to deduct a portion of the transfer duty paid on purchase of the Property in the income year ended 30 June 20XX under subsection 25-20(2) of the ITAA 1997?

Summary

Yes. You are entitled to a partial deduction for the transfer duty on your lease as your Property is partly used for income producing purposes. An apportionment of a deduction for stamp duty must consider both the actual and future use of the Property.

Detailed reasoning

12.      Subsection 25-20(2) states:

Property used partly for that purpose

If you have used, or will use, the leased property only partly for that purpose, you can deduct the expenditure to the extent that you have used, or will use, the leased property for that purpose.

13.      In the context of subsection 25-20(2) of the ITAA 1997 the phrase 'have used' is in reference to actual use of the property and 'will use' is a reference to the future use of the property.

14.      For the purpose of apportioning the cost of the transfer duty both actual and future use of the property must be considered. The cost must be apportioned relative to the use of the property so that the deduction can be made to the extent that the Taxpayer has used or will use the property for income producing purposes.

Have used the leased property

15.      In respect of 'have used', the Property was purchased subject to an existing tenancy agreement which expired on Date X. Therefore, the Property was used for income producing purposes between Date X and Date X.

16.      From Date X the Property was available for rent, and in Date X became subject of a 2-year lease agreement.

17.      The Property was used for private purposes for a maximum of 4 months, i.e. from Date X to Date X.

18.      Therefore, at the end of Date X it can be demonstrated that the period of use for the Property for the purpose of producing assessable income was approximately 20 months, and for a non-income producing purpose was approximately 4 months.

Will use the leased property

19.      The current lease agreement was entered into in Date X and expires Date X.

20.      Beyond Date X, the period that The Taxpayer anticipates holding the Property, and the portion of the holding period that The Taxpayer anticipates using it to produce assessable income in the future will assist in determining the reasonable apportionment of the transfer duty expenditure for the purpose of producing assessable income.

Conclusion on subsection 25-20(2) apportionment

21.      In calculating the deduction allowable, the use of the Property up to Date X can be readily anticipated (assuming the existing rental agreement will not be terminated). The Taxpayer will need to determine the period of time he would reasonably anticipate holding the Property, and the usage of the Property for the remainder of the holding period and their ownership share of the Property.

22.      For example, if the Taxpayer were to anticipate holding the Property for a further 10 years (120 months) until Date X, and will use the Property solely for income producing purposes throughout this 10-year period, the deductible amount may be calculated as:

transfer duty x months used for income producing purposes x ownership interest %

total months property anticipated to be held

That is:

$XXX (tfr duty) x 159 months (income producing purpose) x 100%

163 months (total ownership period)

= $XXX x 95.7% x 100%

= $XXX

23.      In this example, the Taxpayer would be entitled to a deduction for the amount of $XXX in respect of the transfer duty incurred on the purchase of the Property.

Question 3

If it is subsequently determined that the deduction claimed for transfer duty under section 25-20 by the Taxpayer in the year ended 30 June 20XX based on past use and the anticipated future holding period and use is greater than the deduction that could have been claimed based on the actual future holding period and/or use, is there an assessable balancing adjustment or clawback of any portion of the tax deduction claimed?

Summary

No. Neither section 25-20 nor any other provision of the ITAA 1197 or the Income Tax Assessment Act 1936 (ITAA 1936) provides for an assessable balancing adjustment or clawback in respect of deductions claimed under section 25-20 in these circumstances.

Detailed reasoning

24.      Where it is determined that the deduction previously claimed for transfer duty under section 25-20 by a taxpayer based on past use and the anticipated future holding period and use is greater than the deduction that could have been claimed based on the actual future holding period and/or use, there is no assessable balancing adjustment or clawback provision in the ITAA 1997 or the ITAA 1936 which applies to that previous deduction.

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