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Edited version of your private ruling
Authorisation Number: 1012521473916
Ruling
Subject: Deductions and expenses - Key money
Question 1
Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for money paid to secure a lease?
Answer
No
Question 2
If the expenditure is capital in nature, can the expense be amortised over a period?
Answer
No
This ruling applies for the following period
Year ending 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the facts provided in your application for private ruling dated dd/mm/yyyy.
You commenced a business in the 2012-13 financial year.
When taking over a lease of the commercial property in which the business was to operate, an amount was paid to the previous tenant of the property so you could secure the rental contract.
Under the Retail Leases Act 2003, a landlord must not seek or accept payment of key money.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 40-880
Income Tax Assessment Act 1997 Paragraph 40-880(5)(d)
Reasons for decision
Under section 8-1 of the ITAA 1997, expenditure incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of producing assessable income, is deductible if it is not capital or of a capital, private or domestic nature.
The leading authority on the distinction between revenue and capital outgoings is the judgment of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; 1 AITR 403. Dixon J set out three matters to be considered (at CLR 363):
(a) the character of the advantage sought, and in this its lasting qualities may play a part,
(b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and
(c) the means adopted to obtain it, that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.
In applying these factors to your case, clearly the payment is a once-off expense calculated to produce a benefit for the business for the working life of the business, that is, an enduring benefit. The outgoing is not incurred over the life of the benefit but as a preliminary expense in obtaining the benefit.
Accordingly, the expense is of a capital nature and is not deductible under section 8-1 of the ITAA 1997.
Amortisation
Section 40-880 of the ITAA 1997 provides a deduction over five income years for certain business related capital expenditure, referred to as 'blackhole expenditure'. However, paragraph 40-880(5)(d) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 for an amount of expenditure you incur to the extent that it is in relation to a lease or other legal or equitable right.
There are no other provisions in the ITAA 1997 that allow the payment to be amortised over the life of the business or the term of the lease and it cannot be treated as a security deposit or a bond.