Private ruling: Deductions
Published: July 2011
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for a cash contribution made to a council in lieu of providing car parks? | A1: No. | Q2: Are you entitled to a deduction over 5 years under section 40-880 of the ITAA 1997 for a cash contribution made to a council in lieu of providing car parks? | A2: No.


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 995-1

Reasons for decision: Summary: Section 8-1 (General deductions) Section 8-1 of the ITAA 1997 allows a deduction from your assessable income of any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business. However you cannot deduct a loss or outgoing under this section to the extent that it is a loss or outgoing of capital or of a capital nature. It is considered that a cash contribution made to a council in lieu of providing car parks has an enduring benefit and therefore capital in nature. Therefore a deduction under section 8-1 of the ITAA 1997 is not allowable whether a one-off payment is made or a payment is made over two financial years. | Detailed Reasoning - Carrying on a business: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. Taxation Ruling TR 97/11 states that the question of whether a person is carrying on a business is determined by the facts in each individual case. This is done by considering the following factors that have been used in court cases: · the nature of the activities, particularly whether they have the potential of profit making; · the repetition and regularity of the activities; · organisation in a business-like manner, the keeping of books or records and the use of a system; · the volume of the operations; and · the amount of capital employed. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. | Detailed Reasoning - Letting of property: Taxation Ruling IT 2423 considers when renting properties constitutes a business for tax purposes. The ruling states that the question of whether you are carrying on a business of letting property largely depends upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business. | Detailed Reasoning - Application to your circumstances: Your current circumstances do not support the conclusion that the management of the property requires more than infrequent or intermittent attention. You have only one tenant that being a related entity. You do not have any ongoing or frequent requirements to advertise and interview new tenants. You do not have any ongoing requirement to negotiate lease agreements. The activity is not conducted on a sufficient scale to be considered a business. The quantum of rental income derived does not affect the characterisation of the activity. The commercial property is not of a scale to take the activity beyond a passive income producing investment. | Detailed Reasoning - Section 40-880 (Blackhole expenditure): Capital expenditure that is not otherwise deductible and that relates to a business that was or is proposed to be carried on for a taxable purpose is deductible over five years provided the deduction is not denied by some other provision. You are not considered to be carrying on a business of renting properties. It is considered to be a passive investment. Therefore a deduction under section 40-880 of the ITAA 1997 is not allowable.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You own a commercial building and you lease this building to a related entity. | The related entity wishes to expand their business by employing more staff. The local council will grant a permit for this to occur provided you pay a sum of money in lieu of car parking spaces that cannot be provided onsite. | The council will develop an adjacent block of council land to include car parking spaces.