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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 a fee paid to the Office of the Protective Commissioner (Protective Commissioner) as a cost of seeking their approval to lease a residential property?

No. A taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for a fee paid to the Protective Commissioner as a cost of seeking their approval to lease a residential property.

The taxpayer is under a legal disability.

Their financial affairs were administered by the Protective Commissioner but managed by an appointed third party (the manager).

The manager wishes to lease out a residential property owned by the taxpayer in order to earn rental income.

Prior to entering into a lease the manager, under the terms of their appointment, must obtain the approval of the Protective Commissioner.

The Protective Commissioner charged the taxpayer, in accordance with Regulation 4(1)(h) of the NSW Protected Estates Act 1983, a fee representing the time spent in assessing the manager's proposal to lease the property.

Paragraph 8-1(1)(a) of the ITAA 1997 allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income.

To be an allowable deduction the expense must be 'incidental and relevant' to the gaining or producing of assessable income ( Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236).

An expense may not be 'incidental and relevant' if it is incurred 'too soon' to the gaining or producing of assessable income ( FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

The mere fact that the expense is a necessary prerequisite to the gaining or producing of assessable income is not sufficient in itself to make it incidental and relevant ( Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166; Lodge v. Federal Commissioner of Taxation (1972) 128 CLR 171; 72 ATC 4174; (1972) 3 ATR 254).

In Case T99 86 ATC 1165; AAT Case 13 18 ATR 3061 the taxpayer acquired land with the intention of developing it into a tourist resort and wished to claim the interest on money borrowed to finance the purchase. At the time of purchase the land was not zoned for the intended use of the taxpayer even though informal inquiries had been favourable.

The deduction was disallowed because the taxpayer '... was not unequivocally committed to proceed with his stated intention because he could not do so since the land was not appropriately zoned.'

In the circumstances here the payment to the Protective Commissioner was necessary before the property could be rented. Even though it was a necessary prerequisite to the earning of rental income it was incurred 'too soon' in a functional sense to be considered 'incidental and relevant' to the gaining or producing of assessable income. They were not 'unequivocally committed' to renting out the property because they did not have the approval of the Protective Commissioner.

As such, no deduction is allowable under section 8-1 of the ITAA 1997 as the expense is not incurred in the gaining or producing of assessable income.