Private ruling: rental property deductions
Published: November 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the establishment fee? | A1: No. | Q2: Is the establishment fee capital expenditure? | A2: Yes. | Q3: Are you entitled to a deduction for the valuation fee? | A3: No. | Q4: Is the valuation fee capital expenditure? | A4: Yes. | Q5: Are you entitled to a deduction for the annual management fee? | A5: Yes.

Relevant facts and circumstances: You and another individual purchased a home and land package as an investment property. As part of this process, you have decided to take up a certain scheme. You engaged an agent to make all the arrangements on your behalf in relation to enrolling in the scheme. The agent charged a fee for this service. To enrol in the scheme you were also required to pay a valuation fee to determine the correct market value of the property. This fee was to determine the correct rent to be charged whist still falling within the scheme guidelines. You also pay an annual management fee to an agent. This fee is charged the agent for services performed in managing the scheme investment including receipt of scheme correspondence and incentive payments.

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

Reasons for decision: Detailed Reasoning - Question 1 & 2: 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. In your case, a fee was paid to an agent to make all arrangements on your behalf in relation to enrolling in the scheme. The fee was incurred in relation to the acquisition of the property. Therefore, the fee is considered to be a capital expense and specifically excluded as a deduction under section 8-1 of the ITAA 1997. The expense would be included, however, under the second element of the cost base for CGT purposes which includes the incidental costs incurred to acquire the CGT asset or that relate to a CGT event that happens in relation to the asset. These incidental costs include: · professional fees including the remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser · costs of transfer · stamp duty and other similar duty · costs of advertising or marketing (but not entertainment) for a buyer or seller · valuation or apportionment costs · search fees relating to a CGT asset (such as fees to check land titles and similar fees, but not travel costs to find an asset suitable to purchase) · the cost of a conveyancing kit (or similar cost), and · borrowing expenses (such as loan application fees and mortgage discharge fees). | Detailed Reasoning - Question 3 & 4: As stated above, 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. The valuation fee was paid to determine the correct market value of the property to establish the amount of rent you could charge. This fee was incurred prior to the production of assessable income from the rental property. Therefore, the fee is considered to be a capital expense and specifically exclude as a deduction under section 8-1 of the ITAA 1997. Professional fees including the remuneration for the services of a valuer are included under the second element of the cost base for CGT purposes. Therefore, the valuation fee would be included in the cost base for CGT purposes. | Detailed Reasoning - Question 5: As stated above, 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. In your case, you incur an annual management fee which is paid to the agent. This fee will be incurred in relation to an income producing rental property and is therefore a deductible expense under section 8-1 of the ITAA 1997.