Private ruling: Rental property expense
Date of advice: 10 November 2016
Published: March 2017
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim your share of the charge paid to the council for work on the road adjacent to your rental property as a deduction? | A1: No | Q2: Are you entitled to your share of a capital works deduction for the charge imposed by the council? | A2: No | Q3: Does the charge imposed by the council form part of the cost base of your rental property for capital gains tax (CGT) purposes? | A3: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 43-110 | Income Tax Assessment Act 1997 section 43-115 | Income Tax Assessment Act 1997 section 43-120 | Income Tax Assessment Act 1997 subsection 110-25(5)

Reasons for decision: Summary: General deduction under section 8-1 Section 8-1 of the Income Tax Assessment Act 1997 (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. Although the charge imposed by the council for the road construction works was incurred while earning assessable income from your rental property, the expenditure is considered to be of a capital nature. Expenditure is capital in nature where it is made with a view to bring into existence an asset or advantage that is of enduring benefit. Capital expenditure is characterised by the fact that it is usually a one-off payment and establishes, replaces or enlarges the income producing asset. Your payment to the council is considered an outgoing of a capital nature and you are therefore not entitled to a general deduction under section 8-1 of the ITAA 1997 for the cost incurred. Capital works deduction Division 43 of the ITAA 1997 allows a deduction for certain construction expenditure on assessable income producing buildings and other capital works. Section 43-110 of the ITAA 1997 explains that a taxpayer can only get a deduction if the taxpayer owns, leases or holds part of a construction expenditure area of capital works. The area a taxpayer owns, leases or holds is called your area. The construction expenditure area in this case would be the road where your rental property is situated and drainage and road construction works are being completed. In your case, your payment to the council is capital in nature, however you do not own, lease or hold part of the construction area of capital works. You do not have a legal right in the land or any other right, power or privilege over the land on which the capital works are constructed (sections 43-115 and 43-120 of the ITAA 1997) and as such, you are not entitled to a deduction for capital works under Division 43 of the ITAA 1997. Cost base As your payment to the council is a capital expense, which is not deductible, we need to consider whether the expenditure can form part of the cost base of your rental property. Subsection 110-25(5) of the ITAA 1997 states that the fourth element of the cost base for CGT purposes is capital expenditure you incurred the purpose or expected purpose of which is to increase or preserve the asset's value. In your case, the payment you made to the council will go toward the cost of construction of a sealed road in front of your rental property. It is reasonable to expect that the sealed road work completed where your rental property is situated may increase its value and therefore you would be able to include the cost incurred as part of the fourth element of cost base for CGT purposes under subsection 110-25(5) of the ITAA 1997.

Relevant facts: You are the joint owner of a rental property from which assessable income is earned. | The property was rented or available for rent in the 20YY year. | You acquired the property after 20 September 1985. | The council is able to raise funds for works that are of special benefit to properties within the municipality through the levying of a special charge to land owners. | The council imposed a special charge to cover the cost of construction of a sealed street where it was previously gravel. | All property owners in the street were required to pay the charge. | You paid part of the charge in the 20YY year.