Private ruling: rental property expenses - stamp duty
Published: August 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to claim a deduction for stamp duty incurred on the purchase of a leasehold property, where the property will be used exclusively for income producing purposes, and the stamp duty is incurred prior to the derivation of assessable income? | A1: Yes

Relevant facts and circumstances: You purchased a property "off the plan". As the property is a leasehold, you incurred stamp duty expenses on preparation of the lease. The property will be used exclusively for income producing purposes. The property is not yet producing assessable income as it is still under construction. The builders have estimated a completion date of approximately two and a half years after the contract to purchase the property was signed.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-20

Reasons for decision: Summary: 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. Generally, expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction. Taxation Ruling TR 2004/4 considers the implications of the decision of the High Court in Steele v. FC of T99 ATC 4242; (1999) 41 ATR 139 ( Steele's Case ) . While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including rates, agent fees and stamp duty on leases. In Steele's Case , the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. It follows from Steele's Case that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income if: 1. the interest is not incurred 'too soon', is not preliminary to the income earning activities, and is not a prelude to those activities; 2. the interest is not private or domestic; 3. the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost; 4. the interest is incurred with one end in view, the gaining or producing of assessable income; and' 5. continuing efforts are undertaken in pursuit of that end. Paragraph 36 of TR 2004/4 states that a test of 'continuing efforts' would need to be set within the context of the normal time frames of the relevant industry. However, if a venture becomes truly dormant and the holding of the asset is passive, relevant interest will not be deductible even if there is an intention to revive that venture some time in the future. Subsection 25-20(1) of the ITAA 1997 provides that a deduction is allowable for the cost of preparing, registering or stamping a lease of property or an assignment or surrender of a lease of property, where the property has been or will be used solely for the purposes of producing assessable income. In your case, you have purchased a property "off the plan" with the sole intention of holding it for income producing purposes. The builders have advised that the building will be completed approximately two and a half years after the contract to purchase the property was signed. As the building is under construction you are considered to be undertaking continuing efforts in pursuit of producing assessable income. You are considered to have satisfied all of the criteria set out in Steele's case above. As the costs of preparing a lease for an income producing property are considered deductible, and you have satisfied the criteria set out in Steele's case , you are therefore entitled to claim the stamp duty expense as a deduction in the year in which it was incurred.