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Ruling

Subject: Rental deductions

Question 1

Are you entitled to a deduction for all of the expenses incurred under the head lease arrangement?

Answer

No.

Question 2

Are you entitled to a deduction for a portion of the expenses incurred under the head lease arrangement?

Answer

Yes, refer to reasons for decision.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The scheme is a Commonwealth Government scheme designed to encourage property investment by offering tax and cash incentives to providers.

Entitlement to these incentives is subject to certain conditions being met.

The scheme incentives offered are annual incentives, comprising of:

· A Commonwealth Government incentive made by way of a refundable tax offset, and

· A cash payment from the relevant state government, which is non-assessable non-exempt income.

The entity is an approved participant in the scheme.

The entity is currently involved in an arrangement where it enters into a head lease arrangement (the arrangement) with property owners.

A management fee will be charged by the entity to the property owners and returned as income.

The entity will also incur expenses from the sub-lease of the property including (but not limited to):

· the market value rent paid to the property owners,

· advertising costs for finding eligible tenants,

· property management costs, and

· administration costs.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1,

Income Tax Assessment Act 1997 section 8-1(2), and

Income Tax Assessment Act 1997 paragraph 8-1(2)(c).

Reasons for decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income.

However subsection 8-1(2) of the ITAA 1997 states you cannot deduct a loss or outgoing to the extent it is of capital or of a capital nature, of a private or domestic nature, or incurred in producing exempt income or non-assessable non-exempt (NANE) income.

Expenses incurred in respect of a rental property are generally considered to be incurred in gaining or producing assessable income and, subject to the operation of subsection 8-1(2) of the ITAA 1997, are therefore deductible.

Apportionment of expenditure is necessary where it serves both an assessable income producing end and some other end: (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236).

In this case, you will incur various rental expenses from the sub-lease of the property. While the derivation of assessable income by way of rent is one objective achieved by participation in the scheme, the receipt of the NANE income from the government incentive is another. The rental expenses are not deductible to the extent they are incurred in gaining NANE income (paragraph 8-1(2)(c) ITAA 1997).

Therefore, the rental expenses incurred in respect of the property must be apportioned, limiting a claim for any deduction to the portion of costs relating to the derivation of assessable income.