Private ruling: CGT - company administration costs
Published: September 2014
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2009

Ruling: Q1: Are the following items deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997): • insurance premiums and broker fees for insurance relating directly to the Property; and • insurance premiums and broker fees for public liability insurance? | A1: Yes | Q2: Are the following items deductible under section 8-1 of the ITAA 1997: • advertising costs directly relating to the sale of the Property • real estate agents fees and commissions • valuation fees • settlement adjustments • legal costs relating directly to the sale of the property • advertising costs relating to the administration of the petitioning creditors' costs • legal fees relating to the administration of the Company; and • appointee's remuneration? | A2: No | Q3: Are the following items included in the cost base of the Property: • advertising costs directly relating to the sale of the Property • real estate agents fees and commissions • valuation fees • settlement adjustments; and • legal costs relating directly to the sale of the property? | A3: Yes | Q4: Are the following items included in the cost base of the Property: • advertising costs relating to the administration of the Company • petitioning creditors' costs • legal fees relating to the administration of the Company; and • appointee's remuneration? | A4: No | Q5: Are the following items deductible under section 40-880 of the ITAA 1997: • advertising costs relating to the administration of the Company • petitioning creditors' costs • legal fees relating to the administration of the Company; and • appointee's remuneration? | A5: No

Relevant facts and circumstances: The Company was the registered proprietor of the Property. The Property was a commercial property that was leased to long term tenants. No additional services (for example, security) were provided to the tenants of the Property. The Property was the only asset to be held by the Company. The Company did not carry on any other activities other than to lease to Property. Voluntary administrators were appointed to the Company, pursuant to section 436A of the Corporations Act (Cth) 2001 . The power and rights to sell the Property remained with Administrators. After several auctions being held the Property had failed to sell, however it was ultimately sold to a third party. The following costs were incurred in relation to the administration of the Company and the disposal of the Property: • insurance premiums and broker fees • advertising costs • real estate agents fees and commissions • valuation fees • settlement adjustments • legal costs • petitioning creditors' costs; and • appointee's remuneration.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 40-880 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 110-35

Reasons for decision: Detailed Reasoning - 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. Property expenses Where a property is used to produce assessable income, certain expenses in relation to such a property can be immediately deductible under section 8-1 of the ITAA 1997. Insurance expenses (in relation to building, contents and public liability) are one type of expense that is immediately deductible under section 8-1 of the ITAA 1997 ( Rental properties 2013 NAT 1729). However, costs that are incurred in relation to the acquisition or disposal of a property are not immediately deductible (although they may be included in the cost base of the property). In this case, a number of expenses were incurred directly in relation to the Property. The insurance expenses are deductible under section 8-1 of the ITAA 1997. However, the other expenses relating to the Property (advertising, real estate agent fees and commissions, valuations, settlement adjustments, legal fees) were incurred in relation to the disposal of the property. Accordingly, these expenses are not deductible under section 8-1 of the ITAA 1997. Administration costs Where expenditure is devoted to a structural rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible ( Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; 5 ATD 87; (1983) 1 AITR 403) The costs that were incurred in relation to the administration of the Company were paid in relation to the structure of the Company as opposed to an operational purpose. Accordingly, the payments in relation to the administration of the Company (advertising costs relating to the administration of the Company, petitioning creditors' costs and legal fees relating to the administration of the Company) are capital in nature and therefore not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Cost base: Section 110-25 of the ITAA 1997 provides that the cost base of a capital gains tax (CGT) asset is comprised of the following five elements: • money or property given to acquire the asset • incidental costs of acquiring the CGT asset or that relate to the CGT event • costs of owning the asset • capital costs to increase or preserve the value of your asset or to install or move it; and • capital costs of preserving or defending your ownership of or rights to your asset. Section 110-35 of the ITAA 1997 expands on the definition of incidental costs in relation to the second element. It specifically includes the remuneration for the services of a valuer, auctioneer, accountant, broker, agent, consultant and legal adviser. Costs of transfer and advertising to find a buyer are also identified as incidental costs. Accordingly the remaining expenses that directly relate to the Property (advertising, real estate agent fees and commissions, valuations, settlement adjustments and legal fees) will be included in the cost base of the Property. The expenses that relate to the administration of the Company (advertising costs relating to the administration of the Company, petitioning creditors' costs and legal fees relating to the administration of the Company) do not directly relate to the acquisition or the disposal of the Property nor can they be considered costs of ownership. While these costs are capital in nature, they were not incurred to increase or preserve the value of the Property or to defend the Company's ownership. Accordingly, the expenses relating to the administration of the Company will not fall within any of the five elements of the cost base of the Property. | Detailed Reasoning - Section 40-880: Subject to the specified limitations and exceptions, paragraph 40-880(2)(a) to 40-880(2)(c) of the ITAA 1997 allow a taxpayer to deduct capital expenditure they incur if it is 'in relation to' a business: • currently carried on by them • formerly carried on by them or by another entity; or • proposed to be carried on by another entity. Was the Company carrying on a business of letting property? Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Normally the receipt of income from the letting of property to a tenant(s) does not amount to the carrying on of a business ( Wertman v. Minister of National Revenue (1964) 64 DTC; Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957; Cripps v. FC of T 99 ATC 2428; Case X48 90 ATC 384; (1990) 21 ATR 3389). This is because of the limited scope of the rental property activities and the limited degree to which an owner actively participates in rental property activities. Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business than it is for an individual (paragraph 3 of Taxation Ruling IT 2423). However a company's activities would still need to exhibit certain characteristics to be considered to be carrying on a business that are identified within Taxation Ruling TR 97/11.Whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case, ( Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). A conclusion that a business of letting property was being carried on would depend largely upon the scale of operations. TR 97/11 identifies the general factors that are considered important in determining the question of whether a business activity is being carried on: • whether the activity has a significant commercial purpose or character • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or sporting activity. TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case. In this case, while there may have been a real prospect of profit from leasing the Property, the Company only held one Property that was leased to long term tenants and no additional services were provided to those tenants. We do not consider that the activities carried on by the Company were of the same kind or on the same scale as that of ordinary trade in the business of letting properties. After considering the above factors, the overall impression gained is that that the Company held a passive investment and was not carrying on a business of letting property. As the Company was not carrying on a business, the expenses in relation to the administration of the Company can not relate to a business that is currently, formerly or proposed to be carried on. Accordingly, the expenses in relation to the administration of the Company (advertising costs relating to the administration of the Company, petitioning creditors' costs and legal fees relating to the administration of the Company) will not be deductible under section 40-880 of the ITAA 1997.