Private ruling: Rental property deductions
Date of advice: 20 March 2024
Published: 29 April 2024
Ruling period: Year ending XX June 20XX
Date scheme commenced: XX July 20XX

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') for real estate agent fees, sales and advertisement fees in connection with buying and selling the property located at XX XX XX ('the Property'). | A1: No.

Relevant facts and circumstances: You own a rental property which was listed to be rented in MM 20XX. The Property is leased through a real estate agent who adjusts the rent to the market rate annually. A tenant was residing in the Property until the DD MM 20XX. On DD MM 20XX the Property was vacated. From DD MM 20XX until DD MM 20XX the Property was not listed for rent and was advertised for sale through a sale campaign as an auction. On DD MM 20XX, both the Property sale campaign and auction were cancelled. Subsequently, you instructed your real estate agent to put the Property back on the rental market. The Property was re-advertised for rent in conjunction with an ongoing sales campaign. On DD MM 20XX a new tenant moved into the Property for rental purposes. The costs accrued by the agent in the failed attempt to sell the Property was $XX. In the year ending DD MM 20XX, you claimed $XX as costs against the rental income for the year as an expense deduction.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 110-35

Reasons for decision: Detailed Reasoning - Rental deductions: Expenses relating to a rental property are allowable as deductions, but only for the period the property was rented or available for rent, for example, advertised for rent. Examples of expenses may include: • Real estate agent fees for rental purposes • Advertising for tenants • Cleaning • Council rates • Gardening rates • Insurance • Interest on loan | Detailed Reasoning - Deductibility of expenses: Under section 8-1 of the ITAA 1997 you can deduct expenses incurred in gaining or producing your assessable income, or expenses you necessarily incur in carrying on a business for the purposes of gaining or producing your assessable income. You cannot deduct an expense under section 8-1 of the ITAA 1997 if it is of a capital, private or domestic nature. You also cannot claim a deduction if the expense is incurred in producing exempt income or a provision of the tax law prevents you from claiming a deduction. | Detailed Reasoning - Connection with the income of the taxpayer: To be deductible under section 8-1 of the ITAA 1997, a loss or outgoing must have a sufficient connection with the derivation of the taxpayer's assessable income. The expense must be incurred in gaining or producing the taxpayer's assessable income. The sufficiency of the connection is determined on the facts of the case. | Detailed Reasoning - Property genuinely available for rent: Rental expenses are deductible to the extent that they are incurred for the purpose of producing rental income. Expenses may be deductible for periods when the property is not rented out, providing the property is genuinely available for rent - that is: • the property is advertised in ways which give it broad exposure to potential tenants; and • having regard to all the circumstances, tenants are reasonable likely to rent it. The absence of these factors generally indicates the owner does not have a genuine intention to make income from the property and may have other purposes. | Detailed Reasoning - Acquisition and disposal costs: You cannot claim a deduction for the costs of acquiring or disposing of your rental property such as: • purchase cost of the property • fees on bank guarantees in lieu of deposits • conveyancing costs • advertising expense • fees of buyer's agents you engage to find you're a suitable rental property to purchase, including where the agent recommends a property manager free of charge as an optional supplementary service • stamp duty on the transfer of the property (but not stamp duty on a lease of property) | Detailed Reasoning - Capital versus revenue expense: Capital expense cannot be claimed under section 8-1 of the ITAA 1997. An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature ( British Insulated & Helsby Cables Ltd v Atherton (1926) AC 205; (1926) 10 TC 155). Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature. | Detailed Reasoning - Application to your circumstances: You are not entitled to claim a deduction under section 8-1 of the ITAA 1997 for real estate agents' fees, sales and advertisement fees in connection with buying and selling the Property. The expenses were capital in nature and were incurred with the intention to sell the Property. Where a property is not yet actually being rented it will be considered to be 'held' for the purpose of producing assessable income where it is genuinely available for rent as evidenced by the taxpayer undertaking active and bona fide efforts to let the property at a commercial rental. This would include such activities as listing the property with a real estate agent, placing advertisements in newspapers and not restricting availability (for example, by making the property unavailable for rent during holiday periods) to ensure the taxpayer's private use and enjoyment of the property. ( Case R118 84 ATC 773; (1984) 27 CTBR (NS) 13318; Case P116 82 ATC 590; (1982) 26 CTBR (NS) 372; and Case V133 88 ATC 847). In your case, you did not attempt to rent the Property during the sale campaign but subsequently listed the property for rent with a real estate agent after the sale campaign was unsuccessful.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'