Private ruling: Land tax deduction
Published: April 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: Year ended 30 June 2011

Ruling: Q2: As the Nominated Beneficiary is not entitled to claim a tax deduction for the land tax assessed to the Nominated Beneficiary, can the taxpayer claim the portion of the land tax assessed to the Nominated Beneficiary relating to the land actually held by the taxpayer? Advice/Answers No.

Relevant facts and circumstances: All of the issued units of the Unit Trust are held by the taxpayer. The taxpayer is a discretionary trust. The Unit Trust owns properties that are subject to State land tax, and it has received the 2011 land tax assessment notice. The taxpayer owns one property that is subject to State land tax and it has received a 2011 land tax assessment notice, which also includes its beneficial interests in property held by the Unit Trust. The Nominated Beneficiary has also received a 2011 land tax assessment notice which includes their Nominated beneficial interest in the property held by the Unit Trust, and their Nominated beneficial interest in the property held by the taxpayer. As the property values are aggregated in the Nominated Beneficiary calculation, the total taxable value increases above the value threshold and land tax is assessed at a rate higher than that which was assessed directly to the taxpayer without that calculation. After taking into account credit for land tax assessed directly to the Unit Trust, the taxpayer is left with a balance to pay of which the taxpayers considers a component is attributable to the properties held by the Unit Trust. The taxpayer therefore considers that it has a liability to pay State land tax for land held by another entity. The taxpayer has used the land subject to the land tax solely for the purpose of earning assessable income. There is an amount of land tax assessed to the Nominated Beneficiary that is not an allowable deduction to that person.

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

Reasons for decision: Summary: The taxpayer is entitled to claim a deduction for the amount of land tax incurred under section 8-1 of the ITAA 1997 as the property upon which the land tax was assessed has been used by the taxpayer to earn assessable income. As the claim is allowable in full, it is not necessary to consider the issue of whether any part of the land tax liability relating to the beneficial ownership of the land owned by the Unit Trust is an allowable deduction. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for expenses incurred in earning assessable income, unless the expenses are private or domestic in nature, or are capital or capital in nature. In this case, the State land tax is assessed not only to the land owner, but if the land is owned by a trust, the share attributed to a nominated beneficiary is also assessed to the beneficiary, with a credit provided for the land tax assessed to the trust. The Unit Trust was assessed first on its properties. As the Family Trust is the sole owner and Nominated Beneficiary of the Unit Trust, the Family Trust was required to include the total of the Unit Trust taxable value, plus its own property. However, credit has been given to the taxpayer for the land tax payable by the Unit Trust, so the land tax on its own property. The taxpayer has argued that it has a liability for land tax for property held by another entity. As the taxpayer was allocated a credit for the land tax actually payable by the Unit Trust, then this is not the case, as the credit was actually allowed which has effectively stopped the double taxation on the same property. The property actually owned by the taxpayer has been used for the purposes of earning assessable income, so the land tax is an allowable deduction under section 8-1 of the ITAA 1997 as the expense has been incurred for the purposes of earning of assessable income from that property. Therefore the taxpayer is entitled to claim the land tax deduction for the land tax at the time that it is incurred. This leaves the issue of the property owned by the Unit Trust which has been included on the land tax notice issued to the taxpayer. The first point is that the total amount of land tax payable by the Unit Trust has been credited against the taxpayer's land tax account, and so that amount is not considered to be incurred by the taxpayer. As it has not been incurred, a deduction under section 8-1 of the ITAA 1997 is not allowable. The taxpayer has raised the issue of the additional amount assessed to the taxpayer because the Unit trust actually owned land which was subject to State land tax, as opposed to what would have been levied if the land owned by the Unit Trust was not required to be included. It is not actually necessary to determine this issue as the taxpayer is already entitled to the full deduction shown on the land tax notice under section 8-1 of the ITAA 1997. Therefore the taxpayer is able to claim a deduction for the land tax as it is using the land for the purpose of earning its assessable income. | Summary: The taxpayer is not entitled to claim a deduction for the land tax assessed to the Nominated Beneficiary as it was not incurred by the taxpayer. Even if the taxpayer did actually pay part of the land tax notice issued to the Nominated Beneficiary, it is not entitled to claim a deduction under section 8-1 of the ITAA 1997, as it has not been incurred in producing the taxpayer's assessable income. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 allows a deduction for expenses incurred in earning assessable income, unless the expenses are private or domestic in nature, or are capital or capital in nature. Taxation Ruling TR 94/26 discusses the meaning of 'incurred' for the purposes of section 8-1 of the ITAA 1997. In this case, the relevant land tax notice has been issued to the Nominated Beneficiary. That notice included the three properties owned by the Unit Trust and the taxpayer, plus the land owned by the Nominated Beneficiary. Credit was provided on that notice for the amounts that are actually payable by the Unit Trust and the taxpayer. That left the component relating to the land actually held by the Nominated Beneficiary. This question only required an answer if the Nominated Beneficiary was unable to claim a deduction for this amount. This is the case, as the Nominated Beneficiary was unable to claim the land tax assessed as a tax deduction. The first issue to be considered is whether the amount was actually incurred by the taxpayer. Paragraph 7 of Taxation Ruling TR 94/26 lists some requirements for an amount to be incurred. The first is that the taxpayer must have a presently existing liability. In this case, the land tax notice was not in the name of the taxpayer, but was in the name of the Nominated Beneficiary, so the taxpayer does not have a presently existing liability for that amount. TR 94/26 continues on to state that it is not necessary to have a presently entitled liability to claim an outgoing, if that outgoing was actually made by the taxpayer. However, this brings up a second problem. One of the requirements of section 8-1 of the ITAA 1997 is that the outgoing must be incurred in earning the taxpayer's assessable income, or be necessarily incurred in carrying on a business conducted for the purpose of earning assessable income. As the property in question is actually owned by the Nominated beneficiary, it could not be used to earn passive income (for example rent) for the taxpayer, as that income is assessed to the owners. The taxpayer is not carrying on a business, so that argument cannot be sustained either. The next point is that whilst the land tax notice issued to the Nominated Beneficiary included property actually owned by the taxpayer, the notice also included a credit for the full amount of land tax actually assessed to the taxpayer, so that there is no double counting. This means that there is no amount that directly relates to the property owned by the taxpayer actually outstanding on that land tax notice. As a result, the taxpayer is not entitled to claim a deduction for the land tax that has been assessed to the Nominated Beneficiary on the land jointly owned by the Nominated Beneficiary.

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. | Question 1: Is the taxpayer entitled to claim a tax deduction for the land tax assessed to the taxpayer, when some of the land is beneficially owned as the Nominated Beneficiary of the Unit Trust?