Edited version of private advice

Authorisation Number: 1051974941962

Date of advice: 8 June 2022

Ruling

Subject: Deductions - rental property - foreign country

Question

Are you entitled to a deduction for your share of the expenses incurred in obtaining a valuation report from a foreign country A professional practice?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for income tax purposes.

You own a rental property in the foreign country A.

You have derived income from your that rental property.

You incurred expenses for a valuation report which was prepared by a foreign country A professional practice.

Invoice from the that practice was for the whole building, you can correctly apportion your share.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-5

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)

Section 8-1 of the 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 or relate to the earning of exempt income.

ATO Interpretative Decision ATO ID 2001/422 (Withdrawn) Income Tax Rental Property - deductibility of estimate for cost of actual construction expenditure states that:

Estimates of construction costs by an appropriately qualified person do not affect the income producing capacity of an asset. These estimates are carried out in order to determine the cost of building a capital asset. The estimate is directly related to the asset itself. The purpose of obtaining an estimate is to establish the quantum of construction costs. There is insufficient nexus to the gaining or production of assessable income for a deduction to be allowed. The expenditure is too remote.

In your case, you incurred expenses in obtaining a valuation report, the purpose of obtaining such report is for depreciation purposes. There is insufficient nexus to the gaining of your assessable income, therefore you are not entitled to a deduction for the expenses under section 8-1 of the ITAA 1997.

Section 25-5 of the ITAA 1997

Section 25-5 of the ITAA 1997 allows a deduction where an expense is incurred by a taxpayer in order to manage their tax affairs. The costs of creating and maintaining records for income tax purposes qualifies as an allowable expense under this section.

Capital expenditure is expressly excluded from being deductible under section 25-5 of the ITAA 1997. However, expenditure for this purpose is not necessarily characterised as being 'capital', merely because it relates to matters of a capital nature.

However, subsection 25-5(2)(e) requires that expenditure relating to advice about the operation of a tax law must be provided by a recognised tax adviser to be deductible. Australian quantity surveyors are required to register with the Tax Practitioners Board in order for their fees relating to depreciation and capital works deductions to be deductible.

Accordingly, you are not entitled to a deduction for your share of the expenses incurred in obtaining a valuation report from a foreign country A professional practice.