Private ruling: Lease document expense deduction
Date of advice: 23 November 2018
Published: February 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is a deduction allowed in relation to a lease variation expense incurred in the development of a rental property in the Australian Capital Territory (ACT) in the income year in which it was incurred? | A1: Yes. A deduction is allowed under section 25-20 of the Income Tax Assessment Act 1997 (ITAA 1997) for stamp duty, preparation and registration costs you incur on the lease of a property to the extent that you have used or will use the property as a rental property (as per our Rental properties 2018 guide). You are entitled to a deduction in the income year the cost was incurred as the cost is a lease document expense incurred in relation to a property that you will use partly as a rental property. | Q2: Should the lease document expense deduction that is claimed be based on the proportion of the total lease variation expense equivalent to the proportion of the total property intended to produce rental income? | A2: Yes. Subsection 25-20(2) of the ITAA 1997 states that a lease document expense is only deductible to the extent that you have used, or will use, the property to produce assessable income. As only a proportion of the overall property will be used for income producing purposes, only the equivalent proportion of the lease document expense is deductible.

Relevant facts and circumstances: You hold a property in the ACT under a 99-year crown lease which you have lived in for a number of years. You applied to the ACT Government planning authority for approval to extend and alter the dwelling on your property to create a dual occupancy, and develop a secondary residence that you would use to generate rental income. The planning authority approved your proposal. The approval included a necessary variation to the purpose clause in the crown lease to permit up to two dwellings on the land. In order to have this registered, you had to pay a lease variation charge which you paid during the 20XX-XX income year. The building works were completed in the 20XX-XX income year and the secondary residence was immediately advertised for rent. Shortly afterwards it began producing rental income.

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