Issue
Is the taxpayer entitled to claim a deduction for costs incurred in purchasing a rental property under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The costs incurred by the taxpayer in acquiring a rental property are capital in nature and are not allowable deductions under section 8-1 of the ITAA 1997.
Facts
The taxpayer purchased a rental property.
In purchasing the rental property the taxpayer incurred legal fees, representing advice from a solicitor and their costs to arrange the transfer of the property's title.
The taxpayer also incurred stamp duty on transfer of the property.
Reasons for Decision
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 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 (that is 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 legal fees and stamp duty associated with purchasing the rental 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 and reduced 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