Rental Expenses - cost of relocating assets to a rental property

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for costs incurred in relocating assets to a new rental property?

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for costs incurred in relocating assets to a new rental property as the expenditure is capital in nature.

The taxpayer acquired a new residential property in order to establish a rental property.

The taxpayer incurred costs in relocating assets from a previous rental property.

The assets included a refrigerator, cooler, washing machine and lawn mower.

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, or relate to the earning of exempt income.

The courts have considered what constitutes a capital outgoing. In Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 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 setting up 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 (for example, 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 in relocating assets to the new rental property to ensure that it was suitably equipped to produce assessable income is an expense of a capital nature and is therefore not an allowable deduction under section 8-1 of the ITAA 1997. Note: the cost of relocating a depreciating asset is a second element cost (section 40-190 of the ITAA 1997) of the asset that will increase the amount against which a deduction can be claimed for the decline in value or depreciation of that asset.