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Edited version of your written advice
Authorisation Number: 1012716216541
Ruling
Subject: Bank guarantee fees
Question
Are you entitled to a deduction for fees paid for a bank guarantee used in lieu of a deposit for the purchase of an investment property?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You purchased an off-the-plan investment property.
In lieu of paying a cash deposit, you secured a bank guarantee.
You pay an annual fee for the bank guarantee.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-25
Income Tax Assessment Act 1997 Section 110-25
Reasons for decision
Section 8-1 of the Income Taxation Assessment Act 1997 (ITAA 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.
The courts have considered a number of cases involving issues related to capital and revenue expenditure. In Associated Newspapers Ltd & Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403, Dixon J considered the issue of what constitutes a capital outgoing and stated that:
expenditure and outlay upon establishing, replacing and enlarging the profit yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue.
In your case, it is considered the fees associated with the bank guarantee were paid by you to secure your right to purchase a property that was to be constructed for future income producing purposes. Therefore, the fees are of a capital nature associated with the acquisition of the income producing property and not a deductible revenue outgoing incurred in deriving rental income from the property. Accordingly you are not entitled to a deduction for the bank guarantee fees.
These fees can be distinguished from a loan to finance the payment of a deposit. Although a deposit serves a similar purpose to the bank guarantee, that is to secure the right to purchase the property, it also is a partial payment of the purchase price. It is for this second reason that the interest payable under a loan in relation to a deposit may be a deductible expense.
Additionally, the bank guarantee fees cannot be considered to be a borrowing cost as there is no 'borrowing' for the purposes of section 25-25 of the ITAA 1997.
The costs incurred for bank guarantee fees will form part of the cost base of the guarantee, being the relevant asset acquired, for capital gains tax purposes (refer to subsection 110-25(2) of the ITAA 1997).