Issue
Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred in obtaining a property valuation to determine their continued eligibility to receive an assessable pension?
Decision
No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for expenses incurred in obtaining a property valuation to determine their continued eligibility to receive an assessable pension, as the expenditure is capital in nature.
Facts
The taxpayer is in receipt of an Australian pension which is assessable income under subsection 6-5(2) of the ITAA 1997.
The taxpayer is required to advise the government department responsible for the payment of the pension to the taxpayer if their gross income from all sources or assets exceeds a certain threshold.
The taxpayer received a notice from the government department requesting information to update their records.
The taxpayer was required to obtain a revaluation of an overseas property.
As a result of providing the information, the taxpayer's entitlements remained unchanged and they continue to receive the Australian pension from the government department.
The taxpayer incurred expenses in obtaining the overseas property valuation.
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, or relate to the earning of exempt income.
Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236 established the use of the 'incidental and relevant test' to determine whether there was a connection or nexus between a loss or outgoing and the derivation of assessable income. The Court found that for a loss to come within the meaning of 'in the course of gaining or producing assessable income' it is 'both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income.'
The deductibility of expenditure also depends on whether the essential character of the expenditure is that of an income producing revenue expense.
In Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436, the Court, amongst other things, established that the nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature then the expenses incurred in gaining the advantage will also be of a capital nature. If the advantage gained is of a revenue nature, then the expenses incurred in gaining the advantage will also be of a revenue nature.
Outgoings incurred in the preservation of an existing capital asset have been held to be capital in nature ( John Fairfax & Sons Pty Limited v. Federal Commissioner of Taxation (1959) 101 CLR 30; (1959) 7 AITR 346; (1959) 11 ATD 510).
These principles are relevant in establishing the nature of other expenses.
The taxpayer's entitlement to a pension is a right to receive pension income. This right is a capital asset. The taxpayer incurred expenses in obtaining the property valuation so that their on-going entitlement to a pension could be determined. The advantage sought by the taxpayer from incurring expenses on the property valuation was the preservation of an existing capital asset, being their entitlement to a pension.
As the property valuation expenses incurred by the taxpayer relate to the capital asset they are of a capital nature and a deduction is not allowable under section 8-1 of the ITAA 1997