Private ruling: Rental property deductions - land tax
Published: March 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the land tax paid on property B in the 2011-12 income year? | A1: Yes. | Q2: Are you entitled to a deduction for the land tax paid on property B in the income year that the property becomes available for rent again if the property was used for private purposes at the beginning of that year? | A2: No.

Relevant facts and circumstances: You own a number of properties. Some of the properties are rental properties and one (property A) is your residence. You pay land tax for the rental properties including property B. During the 2011-12 income year, you and your wife moved into one of your rental properties (property B) while you complete renovations to property A. You anticipate that the renovations will take one to two years. Upon completion of the renovations you intend to move back to property A and resume renting out property B.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (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. Land tax associated with a property that is used to produce assessable income is an allowable deduction. | Detailed Reasoning - Deduction in year property ceases to produce income: ATO Interpretive Decision ATO ID 2001/82 considers the need to apportion a deduction for land tax if a property ceases to be income producing part way through the year. ATO ID 2001/82 provides the following: A land owner becomes liable to land tax for the period commencing either 1 January or 1 July (depending on the particular state legislation) if, at a certain point in time (either 31 December or 30 June), he or she satisfies the conditions for its imposition, for example, if the property is being used for income producing purposes. Where a land owner is under an obligation at the start of the land tax financial year to pay land tax because the property is used for income-producing purposes, there will be a sufficient nexus between the outgoing and the production of assessable income for the outgoing to be deductible. If later in the year, after incurring the expense, the property is sold or it becomes the land owner's residence, there is no requirement to apportion the claim for a deduction for the expense incurred. You have incurred expenses in relation to land tax on a property that was only available for rent for part of the 2011-12 income year. When you incurred the expense, your property was held for income producing purposes. Therefore, you are entitled to a deduction for the full land tax paid for property B in the 2011-12 income year. | Detailed Reasoning - Deduction in year property recommences to produce income: In the income year in which you complete your renovations and property B again becomes available for rent, the deductibility of the land tax depends on the use of the property at time the land tax liability is incurred. Taxation Ruling TR 97/7 summarises various propositions of the Courts about when a loss or outgoing is 'incurred' for the purposes of section 8-1 of the ITAA 1997. The ruling states (at paragraph 5), 'As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape.' A liability for land tax is incurred at the start of each year that the land tax is payable. At this time a tax payer is 'definitively committed' or 'completely subjected' to the debt, even if they are unaware of it (ATO Interpretive Decision ATO ID 2010/192). If at midnight on 30 June, immediately preceding the income year in which property B becomes available for rent, you are utilising the property for private purposes, the land tax expense incurred will be private in nature. Accordingly, you will not be entitled to a deduction for the land tax under section 8-1 of the ITAA 1997.

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