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Is a taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses against income from the lease of vacant land?

In part. The amount of the deduction allowable under section 8-1 of the ITAA 1997 is limited to the amount of the income derived from the lease of the vacant land.

The taxpayer purchased vacant land with the intention of building a private residence.

The taxpayer is now trying to sell the vacant land.

The taxpayer is proposing to lease the vacant land for $100 per month for storage, until the land is sold.

The taxpayer is incurring holding costs (e.g., interest) of $900 per month.

Expenditure will be deductible under section 8-1 of the ITAA 1997 if it is incurred in gaining or producing assessable income unless it is of a capital, private or domestic nature.

It is necessary to consider the essential character of the expenditure incurred to determine whether there is a sufficient connection with the assessable income earned.

The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

If the expenditure produces no assessable income, or the amount of assessable income is less than the amount of the expenditure, it may be necessary to examine the circumstances surrounding the expenditure to determine whether it is wholly deductible. This may include an examination of the taxpayer's purpose or intention in incurring the expenditure.

Regard must be had to the taxpayer's purpose or intention at the time the expenditure was incurred.

When it is necessary to apportion a loss or outgoing, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both 'fair and reasonable' in all the circumstances ( Ronpibon Tin NL & Tongkah Compound NL v. FC of T (1949) 78 CLR 47 at 59).

The expenditure may have been incurred, in part, for a purpose other than the production of assessable income. If this is the case the expenditure must be apportioned and a deduction allowed only to the extent that the expenditure was incurred for the income producing purpose. In Fletcher v. Federal Commissioner of Taxation (1991) 173 CLR 1 the court found that it was 'fair and reasonable' to limit the amount of the deduction to the amount of the assessable income actually received in that year.

The taxpayer did not purchase the vacant land for the purpose of gaining assessable income from leasing it for storage. The taxpayer had intended to build a private residence on the land. In these circumstances expenditure would be regarded as private or domestic in nature.

If the taxpayer does earn assessable income from the lease of the allotment this can however be considered to be a secondary purpose. The expenditure is, in part, incurred in order to earn this income. In these circumstances there is a dual purpose in incurring the expenditure and that the taxpayer is entitled to a deduction for a proportion of the expenditure.

It would be fair and reasonable to allow the taxpayer a deduction up to the amount of the income earned.

Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47

Fletcher v. Federal Commissioner of Taxation (1991) 173 CLR 1