Private ruling: Rental property expenses - land tax
Published: May 2013
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2008

Ruling: Q1: Are land tax assessment amounts deductible in the year they are incurred?

Relevant facts and circumstances: The deceased passed away in the 20xx-xx financial year. Probate was also granted in the same financial year. The will named executors who were also the beneficiaries in equal shares. The estate contained two rental properties. One of these has been transferred. The other is still in the ownership of the estate and is continuing to earn rental income. The estate has recently received a land tax assessment for the current and previous four financial years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Backdated land tax A loss or outgoing incurred in gaining or producing assessable income is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year in which the loss or outgoing is incurred. Taxation Ruling TR 97/7 summarises various propositions of the Courts about when a loss or outgoing is 'incurred' for the purposes of section 8-1 of the ITAA 1997. The ruling states (at paragraph 5), 'As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape.' The Courts have described this in various ways: as having a 'presently existing liability'; as being 'definitively committed' or 'completely subjected' to the outgoing in spite of the fact that it remains unpaid. Another requirement is that the amount of the liability is ascertained or reasonably capable of estimation. Deductibility under section 8-1 also depends on the outgoing being 'properly referable' to the income year in which the deduction is sought ( Coles Myer Finance Pty Ltd v. Federal Commissioner of Taxation (1993) 176 CLR 640; 93 ATC 4214 at 4222; (1993) 25 ATR 95 at 105). Taxation Ruling TR97/7 states (at paragraphs 8 and 9) that although these principles derive from cases where taxpayers operated on an earnings basis, the Courts have not generally sought to limit the meaning of the word 'incurred' by reference to the nature of a taxpayer's accounting system. Therefore, a taxpayer who uses a cash receipts based accounting system need not necessarily have paid or borne a loss or outgoing in order for that loss or outgoing to have been 'incurred' for the purposes of section 8-1 of the ITAA 1997, In the present circumstances, you 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. You were '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 ( Case B5 70 ATC 24; 15 CTBR (NS) Case 67 ). 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. In these circumstances, you incurred the land tax expenses for the purposes of section 8-1 of the ITAA 1997 in each income year for which each land tax liability was payable, and not in the income year in which the arrears were paid. Therefore, in order to claim a tax deduction for the land tax, you will need to amend your tax returns for the years the land tax arrears have been assessed. Current year land tax An outgoing for land tax is deductible to the extent that it is incurred in gaining or producing assessable income. A land owner becomes liable to land tax for the period commencing either 1 January or 1 July (depending on the particular state legislation) if, at a certain point in time (either 31 December or 30 June), he or she satisfies the conditions for its imposition, for example, if the property is being used for income producing purposes. Where a land owner is under an obligation at the start of the land tax financial year to pay land tax because the property is used for income-producing purposes, there will be a sufficient nexus between the outgoing and the production of assessable income for the outgoing to be deductible. In your situation the land tax amount for the 2012-13 financial year was incurred when the property was held by the estate for rental purposes and therefore a deduction for the land tax for this year would available even where the property is transferred prior to the payment of the land tax.