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Ruling

Subject: Stamp duty (ACT)

Question 1

Is a portion of stamp duty deductible in the 2011 income year in respect of the purchase of your leasehold property in the Australian Capital Territory (ACT)?

Answer

Yes

Question 2

Will stamp duty expenses not allowed as a deduction form part of the cost base of the property for Capital Gains Tax (CGT) purposes?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You acquired a leasehold property in the ACT in May 2011.

The property was subject to a 99 year crown lease.

You incurred expenditure for stamp duty with respect to the acquisition of the lease on the property.

The property was tenanted at the time of purchase.

You moved into the property in June 2011 after the tenancy agreement expired and the tenants moved out.

The property is still your main residence but you intend to rent it out again some time in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 20-25

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

Income Tax Assessment Act 1997 Section 110-25

Reasons for decision

Subsection 25-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a deduction is allowable for the costs of preparing, registering or stamping a lease of a property where the property is used solely for the purpose of producing assessable income.

Subsection 25-20(2) of the ITAA 1997 states that:

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.

A crown lease on property in the ACT satisfies a general law requirement of a lease in that leases in the ACT are granted for a definite period. Therefore, section 25-20 of the ITAA 1997 applies to allow, or partly allow, costs incurred in the preparation, registering and stamping of a lease on a property in the ACT that has been, or will be, used by the taxpayer for the purpose of producing assessable income.

In your case your ACT property was rented for a period during 2011, after which it became your principal residence. Therefore, as the leased property was only partly used for the purpose of producing assessable income you will need to apportion any deduction claimed for the stamp duty incurred in relation to the lease, to reflect that use.

For the purposes of determining deductibility of lease costs, both actual and future use of the property need to be considered. During the year that the expense was incurred, actual use varied between income producing and private purposes, and it is likely that the property will be used for both income producing and private purposes in the future. This means a deduction for lease costs can only be claimed in part. Apportionment of the costs to determine that amount which is deductible needs to be reasonable.

In your case, for example, if you reasonably anticipate holding the property for 10 years (120 months), and the property is rented out for 8 of those years (96 months), a reasonable deduction could be calculated as:

Lease costs x months used for income producing purposes (96 months) / length of time property will be held (120 months).

If actual use differs from intended use, you may need to show that your intention to rent it out was genuine at the time of claiming the deduction. That is, if the property is your residence for the rest of the time you own it, you may be required to show that you intended to rent it out but your intention changed.

CGT cost base

You make a capital gain or capital loss if a CGT event happens. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset.

Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the cost base of a CGT asset is made up of five elements. You need to add together all these elements to work out your cost base for each CGT asset. The elements are as follows:

Money paid for the asset (or required to be paid) or the market value of property.  

Incidental costs of acquiring the asset or costs in relation to the CGT event, for example professional fees, costs of transfer, stamp duty and advertising costs.

Non-capital costs associated with owning the asset. This includes costs such as rates, land taxes, repairs and insurance premiums.

Capital costs associated with increasing the value of the asset. For example, building a carport or getting approval to build another dwelling on the property.

Capital expenditure incurred to preserve or defend your title or rights to the asset.

In your case you incurred stamp duty costs when purchasing your rental property. These costs are incidental costs and can be included in the second element of the cost base of your property for CGT purposes. However, the costs will not form part of the cost base of the property to the extent that you can claim a deduction.