Edited version of private advice

Authorisation Number: 1052084483641

Date of advice: 6 February 2023

Ruling

Subject: Income tax - deductibility of expenses

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the legal expenses incurred in acquiring a Perpetual Lease for a property in a Commonwealth State, used for income producing purposes?

Answer 1

No.

Question 2

Are you entitled to a deduction under section 25-20 of the ITAA 1997 for the stamp duty incurred in acquiring a property in Commonwealth State used for income producing purposes?

Answer 2

Yes, to the extent that the property is used or will be used to derive assessable income.

This ruling applies for the following period

Income year ended 30 June 20XX.

The scheme commences on

XX July 20XX.

Relevant facts and circumstances

You:

•         acquired a leasehold property on a Perpetual lease under the relevant state legislation

•         paid Stamp duty and

•         incurred legal costs related to the purchase.

The property is predominantly used for income producing purposes.

In the Contract for sale a clause states:

(a)  The parties must bear their own costs of and incidental to this transaction.

(b)  Stamp duty payable on this Contract is payable by the Buyer who also bears all costs including stamp duty and registration fees of and incidental to the preparation and delivery of all transfers and other documents necessary to vest the property in the Buyer.

(c)   ...

Relevant legislative provisions

Income Tax Assessment Act 1997section 8-1

Income Tax Assessment Act 1997section 25-20

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Issue - Deductibility of expenses

Question 1

Deductibility of legal expenses

Summary

The legal expenses that you incurred in acquiring a leasehold property are not deductible under section 8-1.

Detailed reasoning

Section 8-1 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.

Generally, costs associated with acquiring a property are not deductible. For example, conveyancing costs and stamp duty on the transfer of the property are considered capital in nature and therefore not deductible.

The legal costs associated with the purchase of a property are generally not deductible as they form part of establishing the profit-making asset. These costs are a capital expense and are therefore not an allowable deduction under section 8-1. However, these costs would form part of the cost base and reduced cost base of the property for capital gains tax purposes and would be used to calculate the capital gain or loss arising on disposal of the property.

Question 2

Deductibility of stamp duty

Summary

The stamp duty that you incurred on the leasehold property will be deductable under section 25-20.

Detailed reasoning

Subsection 25-20(1) provides that,

you can deduct expenditure you incur for preparing, registering or stamping:

(a) a lease of property; or

(b) an assignment or surrender of a lease of property;

if you have used or will use the property solely for the purpose of producing assessable income.

Subsection 25-20(2) states,

If you have used, or will use, the leased property only partly for that purpose, you can deduct the expenditure to the extent that you have used, or will use, the leased property for that purpose.

The property in question will be used wholly for the purpose of producing assessable income.

ATO ID 2001/614 (withdrawn because it was considered to re-state the law) concluded that a taxpayer is entitled to a deduction under s 25-20 for the stamp duty and registration of transfer expenses incurred in acquiring a crown lease to the extent that the property is used to earn assessable income. In that interpretive decision the following facts existed:

The taxpayer acquired a leasehold property.

The property is held under a crown lease with a term of 99 years.

Half of the property is held by the taxpayer as a rental property and is used to produce assessable income.

The taxpayer lives in the other half of the property.

Stamp duty and registration of transfer costs were incurred by the taxpayer in acquiring the leasehold property.

In your case:

•         you acquired a property on Perpetual lease;

•         a clause in the Sale Contract confirms that you were liable to pay the stamp duty;

•         you predominantly use the property for income producing purposes;

As the property is acquired under a perpetual lease, it is considered as a lease for the purposes of section 25-20. You use the property for income producing purposes.

The expenditure is allowable as a deduction to the extent that the property is used for the income producing purposes in that income year.

Conversely where a property was not used for any income producing purpose in the year when the expenses were incurred no deduction would be allowable.

An apportionment of the relevant expenses can only be made where, in the income year when the costs were incurred, the property was used for both income producing purposes and non-income producing purposes.

In your case, the stamp duty that you incurred on the leasehold property will be deductable under section 25-20 in the year it was incurred against the income earned from that property in that year.