Edited version of your written advice

Authorisation Number: 1012917759661

Date of advice: 30 November 2015

Ruling

Subject: Rental property expenses

Question 1

Is the management fee you paid in respect of house and garden maintenance and rental income guarantee a deductible expense?

Answer

Yes

Question 2

Does the management fee you paid in respect of progress payments, building inspections and building supervision form part of your capital works expenditure?

Answer

Yes

Question 3

Is the management fee you paid in respect of investment club membership and annual market appraisals deductible over a number of years?

Answer

Yes

This ruling applies for the following periods:

30 June 200Y

The scheme commences on:

1 July 200X

Relevant facts and circumstances

You purchased a house and land package in the relevant financial year. The house was intended to be used to produce assessable income.

As part of the purchase cost you paid a management fee. The management fee consisted of the following:

• Twelve months' house and garden maintenance

• Twelve months' rental income guarantee insurance

• Management during construction of the property, including:

• Dealing with financiers and solicitors

• Progress payments during construction

• Indemnifying against cost overruns during construction

• Inspections during construction

• Provision of a quantity surveyor's report

• Provision of an investment profile report

• Ongoing services, including

• Annual market appraisals of the property; and

• Membership of an investment club including newsletters, workshops and the like.

The management fee is paid upon purchase as a set percentage of the final purchase price. The payments are not ongoing.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 43-70

Income Tax Assessment Act 1997 Section 43-215

Income Tax Assessment Act 1936 Section 82KZM

Reasons for decision

Question 1

Section 8-1 of the Income Tax 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.

For a loss or outgoing to be deductible, it must be relevant and incidental to gaining or producing assessable income (Ronpibon Tin NL v FC of T (1949) 78 CLR 47, 8 ATD 431).

The High Court considered the deductibility of a personal disability insurance premium in FC of T v. Smith 81 ATC 4114; 11 ATR 538. In that case a medical practitioner employed by a hospital was allowed a deduction for premiums paid to secure a monthly indemnity against the income loss arising from the inability to earn. It was held that the premium under the policy was deductible even though the purpose of the expenditure was not the gaining of the income in that year. There was sufficient connection between the purchase of the cover against the loss of ability to earn and the consequent earning of assessable income and the outgoing was not of a capital, private or domestic nature. The deduction in that case was allowed under the equivalent of Section 8-1 of ITAA 1997.

A deduction is therefore allowable for premiums paid under an income protection policy that provides against loss arising from an inability to earn income.

Similarly, premiums paid under a policy which provides against loss of rental income in the event of vacancy of your rental property are deductible under Section 8-1 of ITAA 1997 as there is a sufficient connection between the purchase of the cover and the earning of assessable rental income.

Page 11 of the ATO Rental Properties Guide includes a list of rental property expenditure for which you can claim an immediate deduction. Included on this list is gardening and lawn mowing. The portion of the management fee relating to gardening and maintenance is therefore an immediate deduction under section 8-1 of the ITAA 1997.

Question 2

A deduction under Division 43 of the ITAA 1997 for capital works is dependent, among other things, on whether there is construction expenditure for the capital works.

Construction expenditure is defined in subsection 43-70(1) of the ITAA 1997 as 'capital expenditure incurred in respect of the construction of capital works'.

Taxation Ruling TR 97/25 deals with the operation of Division 43 of the ITAA 1997 and provides at paragraph 9 that construction expenditure includes preliminary expenses such as architect fees, engineering fees, foundation excavation expenses and costs of building permits. These expenses are accepted as being 'in respect of' the construction of capital works.

The portion of the management fee relating to the construction of your rental property including inspections and overseeing progress payments therefore forms part of your construction expenditure.

Section 43-215 of the ITAA 1997 states that the applicable annual rate of deduction is 2.5% of your total construction expenditure.

Question 3

Section 82KZM of the Income Tax Assessment Act 1936 (ITAA 1936) states that where an expenditure under an agreement is entered into after 25 May 1988, and the expenditure is in return for services where the eligible service period is greater than 12 months, the expenditure must be apportioned over the period to which the expenditure relates.

In your case, part of the management fee expense is associated with membership of an investment club, regular newsletters, property workshops and annual market appraisals. These services are provided for a period greater than 12 months. The part of the management expenses relating to the provision of these services must therefore be apportioned over the years for which the services will be provided.