Private ruling: Rental deduction
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the special charge imposed by the Council an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Are you entitled to a capital works deduction under Division 43 of the ITAA 1997 for the special charge imposed by the council? | A2: No | Q3: Does the special charge imposed by the council form part of the cost base of your rental property for Capital Gains Tax (CGT) purposes under subsection 110-25(5) of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: You own a rental property from which assessable income is earned. You acquired the property after 20 September 1985. Your rental property is situated within the Council municipality. The Council, under Local Government Act 1989, 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 the following works: · Drainage - to enable efficient removal of storm water · Road Pavement · Kerb & Channel · Footpath · Sealing works All residents of the area were required to pay the special charge under the Local Government Act 1989, as the majority of property owners were not opposed to the works. You paid the special charge in full to the Council in the 2011-12 financial year.

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: Detailed Reasoning - General deduction under section 8-1: 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 except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Although the special charge imposed by the Council 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 of the special charge 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. | Detailed Reasoning - 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 roads in area where drainage and road construction works are being completed. In your case, your payment of the special charge 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. | Detailed Reasoning - Cost base of the property for Capital Gains Tax purposes: As your payment of the special charge 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 for the special charge will go toward the cost of construction of a sealed road, kerbing and footpath in front of your rental property, as well as drainage works to allow for efficient removal of storm water. It is reasonable to expect that the sealed road, kerbing, footpath and drainage work completed on your street may increase the value of your rental property 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.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.