Edited version of your written advice

Authorisation Number: 1012667916747

Ruling

Subject: Land tax

Question

Are you required to apportion a claim for a deduction for land tax you incurred in relation to your property?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2004

Relevant facts

You own an investment property.

You work overseas and return to Australia in each year and use the property for a holiday before returning overseas. However, there have been longer periods when you have used the property for private purposes.

When you are not using the property it is rented or genuinely available for rent.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

To be deductible under this section, the High Court of Australia has indicated that the expenditure must have the essential character of an income-producing expense (Lunney v. FC of T; Hayley v. FC of T (1958) 100 CLR 478 at 497, 498). There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of the assessable income, in which case the occasion of the loss or outgoing will be found in whatever is productive of the assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47 at 56, 57 (Ronpibon Case).

The High Court, in both Ronpibon Case and Fletcher & Ors v. FC of T (1991) 173 CLR 1 at 16 recognised there are at least two kinds of expenditure that require apportionment. The first is expenditure in respect of a matter where distinct and severable parts are devoted to gaining income and other parts are devoted to some other end. The second kind of apportionable expenditure is a single outlay that serves both an income-earning purpose and some other purpose indifferently.

Hence, the Courts have looked to a taxpayer's purpose in incurring expenditure to establish the extent to which it was incurred in gaining assessable income. In relation to purpose, Wilcox J stated in FC of T v Creer (1986) 86 ATC 4318 at 4325:

'Purpose' may refer to the taxpayer's subjective purpose; the end which he or she seeks to achieve by incurring expenditure. It may mean objective purpose, the object which the incurring of the expenditure is apt to achieve.

In the case of a rental property that is rented or available for rent for the full income year, it is clear that expenditure on land tax has the essential character of an income producing expense because it is a compulsory state government impost payable because the property is income producing. It is therefore incidental and relevant to the gaining of assessable income. Further, the occasion of the outgoing is the derivation of rental income because it is that derivation that causes the impost to be payable. In such cases expenditure on land tax is fully deductible.

However, the question arises whether that characterisation of land tax as an income producing expense changes to some extent when the property is also used for non-income producing purposes. ATOID 2001/82 Deductions : deductibility of land tax paid on property no longer producing income, deals with a situation where a property that was rented and subject to land tax as a result of that rental activity, subsequently ceased to be used for rental purposes and became the taxpayer's residence. In that scenario, it was held that there was no need to apportion the land tax to exclude the period after the cessation of the rental activity.

Your situation is slightly different to that in ATOID 2001/82 because your non-income producing use of the property is planned, on-going and intermittent. The question arises therefore whether your intentions and actions with regard to the use of the property for non-income producing purposes changes the characterisation of some portion of the land tax expense.

In this situation, your non-income producing use of the property does not create a liability to land tax - only the income producing use creates that liability. It therefore cannot be said that your objective or subjective purpose in incurring the expense relates to the non-income producing use of the property. The object which the incurring of the expenditure achieves relates only to meeting the government requirements for deriving rental income from the property - it does not relate in any way to the private use of the property.

It is clear therefore that you cannot incur any portion of the land tax expense for the purpose of your private use of the property, as that private use would not generate the liability. Further, there is no evidence of any other significant non-income related purpose in incurring the expense (such as to generate a tax deduction, even though a tax deduction would obviously be an indirect benefit of incurring the expense). The occasion of the entire land tax expense is therefore to be found in the production of rental income and the entire expense is incidental and relevant to that end.

The entire land tax expense has the essential character of an income producing expense. Therefore there is sufficient nexus between the outgoing and the assessable income to make the entire expense fully deductible.