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Ruling
Subject: Property sale expenses
Question:
Can you include, in your rental schedule, as deductible expenses, conveyancing and real estate agent fees incurred when you sold your pre capital gains tax (pre-CGT) rental property?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You sold a pre-CGT rental property.
You incurred sale expenses, including conveyancing fees and real estate agent commission fees.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Section 110-35
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income.
However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are incurred in gaining or producing exempt income.
The High Court of Australia judgment of Dixon J in Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337 (1938) 5 ATD 87) is a leading exposition of the matters that must be examined in order to differentiate whether an amount is capital or revenue in nature. The following indicators, consistent with the matters raised by Dixon J, point towards an expense being capital in nature:
The expenditure is related to the profit yielding structure itself. This includes the establishment, replacement or enlargement of the profit yielding structure of business rather than the money earning process.
The nature of the asset has lasting and enduring benefit to the business.
The payment is made 'once and for all' being a single final provision for the future use or enjoyment of the asset rather than a periodical outlay to cover its use for that period.
As conveyancing fees and real estate agent commission fees are 'once and for all' expenditures incurred in the purchase or sale of a profit yielding asset, they are expenditures that are capital in nature.
It follows conveyancing and real estate agent commission fees are included in section 110-35 of the ITAA 1997 as incidental costs that fall into the cost base of a CGT asset, which states:
There are a number of incidental costs you may have incurred. Except for the ninth, they are costs you may have incurred:
(a) to acquire a CGT asset; or
(b) that relate to a CGT event.
The first is remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser. However, remuneration for professional advice about the operation of this Act is not included unless it is provided by a recognised tax adviser.
The seventh is the cost of a conveyancing kit (or a similar cost).
In summary, page 9 of the Tax Office publication Rental properties 2011-12 (NAT 1729-6.2012) states:
Acquisition and disposal costs
You cannot claim a deduction for the costs of acquiring or disposing of your rental property. Examples of expenses of this kind include the purchase cost of the property, conveyancing costs, advertising expenses and stamp duty on the transfer of the property…However, these costs may form part of the cost base of the property for CGT purposes.
To conclude, section 8-1 of the ITAA 1997 prohibits you from including, in your rental schedule, as deductible expenses, conveyancing and real estate agent fees incurred when you sold your pre-CGT rental property.