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Ruling

Subject: Deductibility of expenses incurred by the taxpayer

Question 1

As the property was bought as a condition of acquiring the business, and as part of the property has been used in the business; can general expenses such as mortgage, electricity, body corporate fees, council rates, etc be claimed?

Answer

The taxpayer can claim the expenses in accordance to the percentage of the property being used in the course of gaining or producing income.

Question 2

If question 1 is negative, can the taxpayer charge market rent to the associated entities who have to live in the property and then claim the corresponding expenditure as in a normal investment property?

Answer

As long as the property is let on a normal commercial basis during the period of tenancy; that is, the taxpayer charges market rent to its associated entities, then the eligible losses and outgoings incurred in relation to the property will be allowable as income tax deductions in accordance with section 8-1 of the ITAA 1997.

This ruling applies for the following period:

30 June 2011

The scheme commences on:

21 October 2009

Relevant facts

The taxpayer entered into a contract to purchase a business.

A property was purchased on the same date.

Associated entities of the taxpayer had to move into the property purchased by the taxpayer.

The property has an office area which is used to carry on the business.

The taxpayer has said that when purchasing the business, there were a number of legal obligations which the taxpayer and their associated entities had to comply with, one of which was to acquire the property.

The taxpayer is looking to charge market rent to the associated entities for living in the property and intends to claim the corresponding expenses on this property.

The taxpayer further stated that the associated entities who are actively involved in running the business, are living in the property only to fulfil certain legal obligations.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 6-5 and

Income Tax Assessment Act 1997, Section 8-1.

Reasons for decision

Question 1

Section 8-1 of the ITAA 1997 allows a deduction for expenses, to the extent that it is incurred in the course of gaining or producing assessable income, except if it of a capital, private or domestic nature or incurred in gaining or producing exempt income.

In this case, the taxpayer has purchased a property of which a percentage of the property is used as an office for the purpose of gaining or producing the business income. As stated above, a deduction would be allowed to the extent that it is incurred in gaining or producing income. Accordingly, the taxpayer can only claim the percentage of any expenses associated with the property, such as mortgage repayments, electricity, body corporate fees, council rates, etc which are incurred in the gaining or producing of the business income.

Question 2

Section 6-5 of the ITAA 1997, provides that assessable income of a taxpayer includes ordinary income. Rent and any other income is assessable as ordinary income pursuant to section 6-5 of the ITAA 1997.

Section 8-1 of the ITAA 1997, allows a deduction for expenses, to the extent that it is incurred in the course of gaining or producing assessable income, except if it of a capital, private or domestic nature or incurred in gaining or producing exempt income.

In order to be eligible to claim expenses that relate to a property, the property must be held for the purpose of gaining or producing assessable income. Generally a property is considered to be held for the purpose of gaining or producing assessable income, if it is tenanted, listed with an agent as being available for tenancy or where the owner is making active and bona-fide efforts to let out the property, as described in Taxation Ruling IT 2167.

Taxation Ruling IT 2167 discusses rental properties - non-economic rental, holiday home, share of residence, etc. cases, and family trust cases.

Section 6-5 of the ITAA 1997 provides that assessable income of a taxpayer includes ordinary income. Rent and any other income, excluding exempt income is assessable as ordinary income pursuant to section 6-5 of the ITAA 1997.

Section 8-1 of the ITAA 1997, allows a deduction for expenses, to the extent that it is incurred in the course of gaining or producing assessable income, except if it of a capital, private or domestic nature or incurred in gaining or producing exempt income.

As long as the property is let on a normal commercial basis during the period of tenancy; that is, the taxpayer charges market rent to its associated entities, then the eligible losses and outgoings in relation to the property would be allowable as income tax deductions in accordance with section 8-1 of the ITAA 1997.