ATO ID 2002/919: Deductibility of Bond for Rental Premises
Date of decision: 16 August 2002
Year of income: Year ending 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer entitled to claim a deduction for a bond paid for premises leased for use in their business under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision
No. The expense incurred in paying the bond is of a capital nature and not deductible in accordance with paragraph 8-1(2)(a) of the ITAA 1997.

Facts
The taxpayer operates a business activity from rented premises. In order to secure the lease on the rented premises, the taxpayer was required to pay a bond to the owner of the premises. The payment of the bond gives the taxpayer the right to use the premises for their business activity until the lease expires. Upon expiry of the lease, the bond will be refunded to the taxpayer if the premises are left in good condition and there are no rent payments outstanding.

Reasons for decision
Summary: 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. The payment of a bond in relation to the lease of premises to be used for business purposes is clearly incurred in producing the assessable income of that business, but the outgoing may be capital in nature. The taxpayer was required to pay the bond in order to obtain access to the property for the period of the lease. The bond is a form of security which ensures the property is able to used by the taxpayer until the lease expires. Therefore, the payment of the bond provides an enduring benefit which allows the conduct of the taxpayer's business activity from the premises for a specified period of time. The payment does not relate to the daily activities of the business. Accordingly, the bond is capital in nature and not deductible in accordance with paragraph 8-1(2)(a) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 8-1 paragraph 8-1(2)(a)
Subject references: Deductions & Expenses Rental expenses