Rental Property Expenses - Building and pest inspection reports prior to purchase

Are costs incurred by the taxpayer for building and pest inspection reports obtained prior to the purchase of a rental property allowable deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The costs incurred by the taxpayer for building and pest inspection reports prior to the purchase of a rental property are not allowable deductions under section 8-1 of the ITAA 1997 as they are capital expenses.

The taxpayer purchased a rental property for income producing purposes.

The purchase of the property was subject to a building and pest inspection reports.

The taxpayer engaged a licensed builder to prepare a building inspection report on the property.

The taxpayer engaged a licensed pest inspector to prepare a pest inspection report on the property.

Section 8-1 of the 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.

The courts have considered what constitutes a capital outgoing. In Sun Newspapers Ltd v. FC of T (1961) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403 Dixon J stated that: 'expenditure and outlay upon establishing, replacing and enlarging the profit yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue.'

The costs associated with the purchase of a rental property are generally not deductible as they form part of establishing the profit making asset. On the other hand, costs incurred in deriving rental income (ie agent commissions to collect rents) are deductible revenue outgoings because they are incurred in deriving income from that asset.

The cost incurred by the taxpayer for building and pest inspection reports conducted as part of purchasing the property is a capital expense and is therefore not an allowable deduction under section 8-1 of the ITAA 1997. However, these costs form part of the cost base of the rental property for capital gains tax purposes and are used to calculate the capital gain or loss arising on disposal of the property.