Edited version of private advice

Authorisation Number: 1052241473483

Date of advice: 22 April 2024

Ruling

Subject: Deductibility on land tax arrears incurred on a rental property

Question

Is the land tax deductible under 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year that the land tax assessments are issued by the State Revenue Office despite the fact they relate to a prior financial year?

Answer

No.

This ruling applies for the following periods

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.      The Company is trustee for the Trust.

2.      The Trust owns a commercial property that is used to generate rental income.

3.      When the property was purchased by the Trust the solicitor mistakenly recorded the owner of the property as a company and not the Trust.

4.      The State Revenue Office (SRO) issued land tax assessments after an audit of the company property holding.

5.      The SRO issued land tax assessments on 15 December 20XX for the land tax years 20XX to 20XX inclusive.

6.      The total cost of the land tax assessments was $X,XXX.

Land Tax Act 2005 (Vic)

7.      The legislation that governs the assessment of land tax in Victoria is contained in the Land Tax Act 2005 (Vic) (LTA) and includes a number of relevant provisions.

8.      Section 7 of the LTA provides that 'land tax is imposed in respect to each year on all taxable land in Victoria'.

9.      Under section 8 of the LTA the owner of the land is liable to pay the land tax.

10.   Subsection 36(1) of the LTA sets out how land tax is assessed and provides:

11.   Subject to this Act, a taxpayer is to be assessed for land tax on land for a tax year on the total taxable value of all taxable land of which the taxpayer was the owner at midnight on 31 December immediately preceding that tax year.

12.   The meaning of tax year for the purposes of the LTA is defined in section 3 of the LTA as '...a year for or in which land tax is being assessed;'

13.   Table 1.4 and Table 1.5 in Schedule 1 of the LTA provides the land tax rates for the relevant years. They are calculated for a calendar year based on the value of the owners total taxable value of land holdings.

14.   As an example, Table 1.4 provides land tax rates for 2009 to 2021 as follows:

Table 1.4: Land tax rates for 2009 to 2021

Table 1: The table provides land tax rates for 2009 to 2021 as follows:

15.   The SRO explains on its website what a land tax assessment period is and provides an example as follows:

Land tax is assessed on a calendar year basis on the land you own at midnight on 31 December before your assessment is issued. For example, the land you own at midnight on 31 December 2023 is used to calculate land tax in 2024.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Summary

The land tax is deductible in the income year to which the liability relates, not the income year in which the arrears were paid.

The liability to pay land tax under the state legislation is incurred for the purposes of section 8-1 of the ITAA 1997 at the start of each calendar year for which the land tax was payable. As the liability to pay land tax was ascertainable in the year to which the assessment giving rise to liability relates, land tax payable was incurred in that year.

Detailed reasoning

Income tax law

Section 8-1 of the ITAA 1997 states:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a ^* business for the purpose of gaining or producing your assessable income.

Land tax incurred in respect of land used for business or income-producing purposes is deductible under section 8-1 of the ITAA 1997 (Moffatt v Webb (1913) 16 CLR 120).

To qualify for a deduction under section 8-1 of the ITAA 1997 in a particular income year, a loss or outgoing must have been incurred in that year.

Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) at paragraph 6 sets out some general rules, settled by case law, that assist in defining whether and when a loss or outgoing has been incurred:

(a)    a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum;

(b)   a taxpayer may have a presently existing liability, even though the liability may be defeasible by others;

(c)    a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities);

(d)   whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise;

(e)    in the case of a payment made in the absence of a presently existing liability (where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid.

A loss or outgoing may be incurred for the purposes of section 8-1 even though no money has actually been paid out. Support for this proposition is provided in TR 97/7 at paragraph 17 which states:

This proposition was recently confirmed by the High Court in FC of T v. Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52 (Energy Resources) when, quoting from James Flood, it said (ATC at 4539; ATR at 56):

'Section 51(1) "has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement".'

Application of the principles to tax related liabilities can be found in Layala Enterprises Pty Ltd (In liq) v Federal Commissioner of Taxation (1998) 86 FCR 348; 98 ATC 4858 (Layala Enterprises). Layala Enterprises involved the question of whether pay-roll tax imposed under two enactments in Western Australia was deductible in the year in which the wages were paid or in the year in which an assessment was issued. The pay-roll tax legislation imposed an obligation to pay pay-roll tax when wages were paid in respect of services performed in Western Australia. The obligation was imposed on the employer that paid the taxable wages. The legislation fixed the rate at which payroll tax was imposed. An employer was liable to lodge the return of the wages in respect of which the wages were payable seven days after the close of a month in which taxable wages were paid and was liable to pay the pay-roll tax within the time which they were required to lodge the return. The legislation then provided for the ability of the Commissioner to assess the amount of taxable wages and the pay-roll tax payable where an employer failed to furnish a return or the Commissioner was not satisfied with the return made.

Cooper J (with whom Wilcox J and Nicholson J agreed) stated:

The liability incurred by the appellant ... to pay pay-roll tax after it became due and owing as a recoverable debt was not a contingent liability; it was a liability ''presently incurred and due though not yet discharged'': The Emu Bay Railway Co Ltd v FC of T (1944) 7 ATD 455 at 461; (1944) 71 CLR 596at 606 and is to be contrasted with a liability ''which is no more than pending threatened or expected'': New Zealand Flax Investments Ltd v FC of T (1938) 5 ATD 36 at 49; (1938) 61 CLR 179 at 207. A liability falling within the former type is a liability incurred for the purpose of s 51(1) of the ITAA whereas a liability of the latter type is not: Nilsen Development Laboratories Pty Ltd & Ors v FC of T 81 ATC 4031 at 4034-4035; (1981) 144 CLR 616 at 623-624.

So understood, the liability of the appellant ... was not a liability to make a future payment. Nor was it one that was contingent or subject to defeasance.[1]

...

... the liability of the appellant ... was imposed by the operation of the Tax Act and the Assessment Act. The liability was not merely impending, threatened or expected. It had been imposed by statute. The liability did not require any voluntary acceptance by the appellant ... to fix it or fix the amount; nor did it require any third party or arbitral or curial process to fix either liability or the amount of the tax.[2]

...

... For reasons given earlier, the assessment by the Commissioner under s 18 of the LTAA is wholly facilitative to effect recovery of the pay-roll tax due. The pay-roll tax liability of the appellant ... was recoverable irrespective of whether the default assessment was made under s 18 of the LTAA or not.[3]

In Case B5 70 ATC 24 (Case B5), the issue before the Taxation Board of Review was the correct timing for the deduction of land tax for which the taxpayer became liable as an owner and lessee of land. The Board of Review considered the relevant provisions of the NSW Land Tax Management Act and found that land tax for the period commencing on 1 November is levied on an owner of land in respect of all land owned by him on 31 October. The actual assessment issues to the land owner sometime after 31 October each year. In that case, the Board determined that the taxpayer came under a present obligation to make a future payment for land tax on 1 November in each year of income. It held that the amount of land tax was quantifiable in the year of income.

In ATO ID 2010/192 Income Tax Deductions: land tax arrears (withdrawn)the Commissioner concluded that arrears of land tax are not deductible in the income year in which the arrears are paid but in the respective income years in which the liability for land tax was incurred. The facts in that ATO ID include that the taxpayer had for a number of years failed to lodge land tax returns and had been assessed for unpaid arrears of earlier years.

In our reasons for decision, we stated:

In the present circumstances, the taxpayer incurred a liability to pay land tax under the provisions of the state legislation at the start of each calendar year for which the land tax was payable. The taxpayer was 'definitively committed' or 'completely subjected' to the debt at that time, even though unaware of it. As the liability to pay land tax was ascertainable in the year to which the assessment giving rise to the liability relates, land tax payable was incurred in that year (15 CTBR (NS) Case 67 Case B5 70 ATC 24;). The Federal Court confirmed this principle, in the context of payroll tax, in Layala Enterprises Pty Ltd (in liq) v. Federal Commissioner of Taxation (1998) 86 FCR 348; 98 ATC 4858; (1998) 39 ATR 502.

The ATO view is now contained in the Rental Properties Guide as follows:

Land tax liabilities may be deductible, depending on when the land tax liability arises. The timing of when you incur a liability to pay land tax will depend on the relevant state legislation. Your liability to pay land tax does not rely on the lodgement of a land tax return or on the taxing authority issuing a land tax assessment. In many states, the year in which the property is used for the relevant purposes determines when you are liable, even if an assessment does not issue until a later date.

When you receive land tax assessments in arrears, the amount of land tax is not deductible in the income year in which you pay the arrears. The land tax amounts are deductible in the respective income years to which the liability for the land tax relates.

Application to your circumstances

Section 7 of the LTA imposes a liability for land tax on the owner of the land each year, based on the total taxable value of all taxable land which the taxpayer owns at midnight on 31 December in the immediately preceding tax year. The liability is assessed on a calendar year basis, with the land tax assessment typically issued between January and June each year.

Under the state legislation, a liability for land tax arose at the start of the calendar year for land owned by the Trust at midnight on 31 December in the preceding year. As the land tax provisions of the state legislation operate in a self-executing way, the Trust incurred the liability under the provisions at the start of each calendar year. On 31 December 2020 for example, the land the Trust owned at midnight was used to calculate its land tax for 2021.

In your case, the SRO issued land tax assessments, after an audit of the company's property holding uncovered that the ownership of the property was incorrectly recorded as belonging to a company and not the Trust. As a result, the Trust was assessed on land tax for the current year and unpaid arrears for prior years. The land tax assessments that issued on 15 December 20XX related to the liability that had accrued for the periods from 20XX to 20XX inclusive.

In accordance with Case B5 and having regard to the matters discussed in Layala Enterprises as at 1 January of the relevant year, the Trust's liability to land tax based on the core provisions of the state legislation was a presently existing liability that was capable of precise ascertainment (or a reasonable estimation). That is the Trust would know what land it owned as at midnight on 31 December for each of the relevant years and could aggregate the taxable values and apply the rates set out in Schedule 1 of the LTA. Therefore, the Trust incurred a liability to pay tax under the provisions of the state legislation at the start of each calendar year for which the land tax was payable.

As the liability to pay tax was ascertainable in the year to which the assessment giving rise to the liability relates, land tax payable was incurred in that year.

Consistent with the ATO view in the Rental Properties Guide the taxpayer incurred the land tax expenses for the purposes of section 8-1 of the ITAA 1997 in each income year to which each land tax liability was payable and not in the income year in which the arrears were paid.

[1] Layala Enterprises Pty Ltd (In liq) v Federal Commissioner of Taxation (1998) 86 FCR 348: 98 ATC 4858 at 4869.

[2] Layala Enterprises Pty Ltd (In liq) v Federal Commissioner of Taxation (1998) 86 FCR 348: 98 ATC 4858 at 4871.

[3] Layala Enterprises Pty Ltd (In liq) v Federal Commissioner of Taxation (1998) 86 FCR 348: 98 ATC 4858 at 4873.