Private ruling: land tax deduction
Published: June 2012
Ruling period: Year ended 30 June 2011

Ruling: Q1: 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? | A1: No.

Relevant facts and circumstances: All of the issued units of the Unit Trust are held by the Family Trust. The Family Trust is a discretionary trust. The Family Trust has a Nominated Beneficiary for State land tax purposes. The Unit Trust (the taxpayer) owns properties that are subject to State land tax, and it has received the 2011 Land Tax Assessment Notice. The Family Trust owns properties that are subject to State land tax and has received a 2011 Land Tax Assessment Notice, which includes its beneficial interests in property held by the taxpayer. The Nominated Beneficiary owns properties that are subject to State land tax and has received a 2011 Land Tax Assessment Notice, which includes his Nominated beneficial interest in the property held by the taxpayer, and his Nominated beneficial interest in the property held by the Family Trust. 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 taxpayer, the Nominated Beneficiary is left with a balance to pay of which he considers a component is directly attributable to the properties held by the taxpayer. The Nominated Beneficiary therefore considers that he has a liability to pay State land tax for land held by another entity. The taxpayer was issued with the first land tax notice as it is the 'head' entity. The Family Trust has received a land tax notice which includes the land owned by the taxpayer. A credit for the land tax assessed to the taxpayer was included on that land tax notice. The Nominated Beneficiary has received a land tax notice which includes the land owned by the taxpayer. A credit for the land tax assessed to the taxpayer was included on that land tax notice. A credit for the land tax assessed to the Family Trust was also included. The taxpayer has used the properties that are subject to land tax solely for the purpose of earning assessable income. The Nominated Beneficiary has not used the properties subject to land tax for the purpose of earning assessable income.

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

Reasons for decision: Summary: The taxpayer is unable 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 incurred 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 Income Tax Assessment Act 1997 (ITAA 1997), as the expenses was 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 issued to the Nominated Beneficiary. That notice included the properties owned by the taxpayer, as well as the properties owned by the Family Trust, and the Nominated Beneficiary. Credit was provided on that notice for the amounts that are actually payable by the taxpayer and the Family Trust. 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. 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. 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 land in issue 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 the land 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.

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