Edited version of private ruling

Authorisation Number: 1011886308100

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deduction- consultant's fee

Question 1:

Are you entitled to a deduction for a portion of a consultant's fee in relation to the searching for an investment property?

Answer: No.

Question 2:

Are you entitled to a deduction for a portion of the consultant's fee in relation to renovation work undertaken on property B?
Answer: No.

Question 3:

Are you entitled to a deduction for a portion of the consultant's fee in relation to the construction of the dwelling on property C?
Answer: No.

Question 4:

Are you entitled to include a portion of the consultant's fee as part of the construction expenditure under the capital works provisions?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts

You have rented property A for a number of years.

You were seeking to purchase another investment property.

You engaged the services of a consultant to assist in the search for a property.

You attended an initial interview with the consultant to assess your financial situation.

The consultant presented a new financial plan.

You reviewed a number of potential investment properties where the consultant provided a spreadsheet showing the costs, the income and the returns on each property.

You purchased a new investment property.

The property was split into properties B and C

The dwelling located at property B was in a run down condition when you purchased it.

The dwelling located at property B required extensive renovation work before it could be rented.

You added an additional room to the dwelling at property B.

Property B was rented after the renovation work was completed.

A few months after property B was rented you submitted plans to have a dwelling built on property C.

Construction of the dwelling on property C was completed a few months later.

The dwelling on property C has been available for rent.

You paid a fee to the consultant.

The consultant provided the following services:

· searching for a new investment property

· managing and organising work to renovate the dwelling on property B

· managing and organising the construction of a dwelling on property C.

You did not carry out any activities in relation to the renovation work or the building of the dwelling.

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
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 NL Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 56 ALR 785; 8 ATD 431 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 (1971) 45 ALJR 426; 2 ATR 541; 71 ATC 4161).

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.

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 paid a fee for the services provided by a consultant.

Searching for a new investment property, managing and organising of the renovation and construction work
The services provided in relation to searching for a new investment property did not relate to servicing or managing income producing investments already in place and was incurred too early in time to be considered part of the income producing process. This portion of the fee was not actually incurred in earning income from the investment property; rather, the expenses were associated with putting the investment in place. Therefore, this portion of the consultant's fee is considered capital in nature and is not deductible under section 8-1 of the ITAA 1997.

Similarly, the services provided by the consultant in relation to managing and organising the renovation work and the construction of a dwelling are also capital in nature as the expenses related to work undertaken to the properties to bring them into a suitable state for long term use before the properties were income producing. Therefore, this portion of the consultant's fee is considered capital in nature and is not deductible under section 8-1 of the ITAA 1997.

Construction of the granny flat and renovation
Division 43 of the ITAA 1997 allows a deduction for capital expenditure incurred in constructing capital works including building and structural improvements where a residential property is used for income producing purposes. This deduction is referred to as a capital works deduction.

The rate allowable is 2.5 per cent of the construction expenditure for a period of 40 years. Construction expenditure is the actual cost of constructing the capital works. .

The building of an extension, alteration or improvements to an existing property and the construction of a new dwelling qualify as capital works under section 43-20 of the ITAA 1997.

Section 43-70 of the ITAA 1997 defines construction expenditure as capital expenditure incurred in respect of the construction of capital works. Taxation Ruling TR 97/25 states 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.
Given the tasks that the consultant has undertaken, it is considered to be similar in character to those costs accepted as preliminary expenses forming part of the construction expenditure. The consultant's services are sufficiently related to the actual construction of the dwelling and renovation work and are 'in respect of the construction of capital works'.

Consequently, you are entitled to include this portion of the fee paid to the consultant as part of construction expenditure of the properties.