Deductibility of consulting fee expenses - rental property

Is a taxpayer entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for consulting fee expenses incurred in purchasing a rental property?

No. A taxpayer cannot claim a deduction under section 8-1 of the ITAA 1997 for consulting fee expenses incurred in purchasing a rental property under section 8-1 of the ITAA 1997.

The taxpayer engaged a property consulting firm to seek and recommend a rental property for investment purposes.

The property consulting firm located a tenanted property.

The taxpayer purchased the tenanted property and derived assessable income from rents.

The property consulting firm charged the taxpayer a fee for its service.

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 the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 56 ALR 785; 8 ATD 431 the High Court stated that: 'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of producing such income.'

The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible ( FC of T v. Maddalena (1971) 45 ALJR 426; 2 ATR 541; 71 ATC 4161).

The consulting fee expense incurred by the taxpayer in engaging a property consulting firm to seek and recommend a rental property for investment purposes is expenditure incurred at a point too soon in gaining or producing assessable income. In other words, the consulting fee expense was incurred before the purchase of the rental property that produced assessable income. Accordingly, the consulting fee expense is not deductible to the taxpayer under section 8-1 of the ITAA 1997. Note: Incidental costs in purchasing a rental property, such as consulting fee expenses etc, may form part of the cost base for capital gains purposes under subsection 110-35(2) of the ITAA 1997.