Edited version of private advice

Authorisation Number: 1012629695854

Ruling

Subject: Stamp duty and legal expenses

Question

Can you claim a deduction for a portion of the stamp duty you incurred on lease documents in relation to your property?

Answer

Yes.

Question

Are you entitled to a deduction for legal fees?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You and your spouse are currently overseas and are purchasing a property in an Australian state which will settle in 2014.

The property will be rented for approximately 8 to 9 months as soon as the sale settles.

You intend making the property your family home when you return to Australia in 20XX.

As a freehold title cannot be obtained, properties are commonly acquired under a 99 year Crown lease.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-20

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Stamp Duty

Section 25-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states the costs of preparing and registering a lease and the cost of stamp duty on a lease are deductible to the extent to which the property has been used, or will be used, for the purpose of producing assessable income. 

Although the term lease is not defined in the taxation legislation, the general law requirement is that a lease must be granted for a definite period. A crown lease with a term of 99 years is a lease for the purposes of section 25-20 of the ITAA 1997.

In your case, your property will be acquired under a Crown lease and, as stated above, is considered a lease for the purposes of section 25-20 of the ITAA 1997.

Subsection 25-20(2) of the ITAA 1997 states that if you have used, or will use, the leased property only partly for the purpose of producing assessable income, you can only deduct the expenditure to the extent that you have used, or will use, the leased property for that purpose.

In your case, your property will be available for rent from the time it was purchased, for eight to nine months, when the property will become your principal residence. Therefore, as the leased property will be only partly used for the purpose of producing assessable income you will need to apportion any deduction claimed for the stamp duty incurred, in relation to the lease, to reflect that use.

Any apportionment would need to be reasonable and reflect the period that you reasonably expect to hold the property, as well as any future intention to again use the property for the purpose of producing assessable income. Providing your expectations and intentions are reasonable at the time you claim the deduction, there will be no consequences if your expectations and intentions subsequently change.

Legal expenses

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 legal costs associated with the purchase of a property are generally not deductible as they form part of establishing the profit-making asset. These costs are a capital expense and are therefore not an allowable deduction under section 8-1 of the ITAA 1997. However, these costs would form part of the cost base and reduced cost base of the property for capital gains tax purposes and would be used to calculate the capital gain or loss arising on disposal of the property.

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