Private ruling: Rental deductions
Published: October 2014
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the annual package fee for an investment loan deductible in its entirety in the year it is incurred? | A1: Yes | Q2: Do you need to apportion the amount of any depreciation or capital works deductions in the 2013/14 income year? | A2: Yes | Q3: Is the fee paid to the quantity surveyor to prepare the depreciation schedule deductible in the 2013/14 year? | A3: No | Q4: Is the special levy paid to the water corporation for sub-meter hand over deductible? | A4: No | Q5: Can you deduct interest expenses related to the late payment of body corporate fees? | A5: Yes

Relevant facts and circumstances: You have a rental property. The rental property is a newly constructed residential unit. Construction was completed in xx July 20xx. You appointed a real estate agent to find a tenant in August 20xx. You started deriving rental income from September 20xx. You have incurred the following expenses: • Annual package fee for investment loan • Construction and capital work expenses • Depreciation • A fee paid to a quantity surveyor to prepare the depreciation schedule in 20xx • A special levy paid to the water cooperation to connect your property to the water supply • Body corporate charges to the administration fund and general purpose sinking fund, including additional interest for late payment

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

Reasons for decision: Detailed Reasoning - Rental Deductions generally: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowable where the losses or outgoings are of a capital, private or domestic nature or another provision prevents the deduction. | Detailed Reasoning - Annual Package fee: Borrowing expenses are those directly incurred in taking out a loan for the property. If your total borrowing expenses exceed $100, they must be apportioned over a period of five years. However it is considered that the annual package fee for your investment loan is not a borrowing expense, instead we consider the fee to be a bank charge fully deductible under section 8-1 of the ITAA 1997 in the year it's incurred. | Detailed Reasoning - Apportionment of Depreciation and Capital Works Deductions: In your situation you property was a newly constructed residential unit which was completed in xx July 2013. Under section 43-30 of the ITAA 1997 capital works deductions are not available before the construction is completed therefore you will need to apportion any capital work deduction for the 2013/14 for any days in the financial year where the property was not completed. Similarly depreciation deductions are only available for the period where the asset is held ready for use as per section 40-60 of the ITAA 1997 and therefore any deduction for depreciation would need to be apportioned as no deduction is available before the construction of the depreciable assets is completed. | Detailed Reasoning - Preparation of Depreciation Schedule: For an expense to be deductible in a particular year under either section 8-1 or section 25-5 of the ITAA 1997 the expense must be incurred in that relevant year. Taxation Ruling TR 97/7 provides the Commissioner's view on when the expense is incurred, it provides generally that expense is incurred when a taxpayer owes the money or is definitively committed to the payment. In your situation you have incurred the expense in the prior 2012/13 income year and accordingly will not be deductible in the 2013/14 income year. Neither will it be deductible in the 2012/13 year as this was before the property was made available for rent. Therefore the expenses from the quantity surveyor's fees in preparing the depreciation schedule will not be deductible as they are incurred at a point too soon. Also it is questionable what value a depreciation schedule could provide that was prepared before the construction of the property was completed. | Detailed Reasoning - Special Levy to Connect Water Service to the Property: Expenses are allowed under section 8-1 of the ITAA 1997 to the extent that they are not capital in nature. The leading judgement on the distinction between capital and revenue expenditure is Sun Newspapers Ltd. V Federal Commissioner of Taxation (1938) 61 CLR 337, Dixon J held: There are, I think three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. In applying the above principles to your factual situation the levy paid to connect your water service will not be deductible as this is a once off payment that provides an enduring benefit and will consequently be capital in nature. | Detailed Reasoning - Body Corporation Fees: Payments you make to body corporate administration funds and general purpose sinking funds are considered to be payments for the provision of services by the body corporate and you can claim a deduction for these levies at the time they are incurred under section 8-1 of the ITAA 1997. Any interest or fees incurred on the late payment of the above will similarly be deductible.