Edited version of your written advice

Authorisation Number: 5010050015824

Date of advice: 5 June 2018

Ruling

Subject: Land Tax in arrears

Question 1

Are you entitled to claim a deduction for land tax in the financial year in which it is paid where the land tax assessment relates to an earlier income year?

Answer

No.

Question 2

Are you entitled to claim a deduction for the land tax in the financial year to which the assessment relates even though you do not receive the assessment notice until a later financial year?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 201x

Year ended 30 June 201x

The scheme commenced on

1 July 201x

Relevant facts

You claim a deduction for land tax for rental properties.

You were subject to audit by your states land tax authority. Land Tax liability was reassessed at the surcharge rate rather than the general rate. This resulted in an adjusted increased liability which was back payment for past years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (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.

Land tax associated with a property that is used to produce assessable income is an allowable deduction.

Taxation Ruling TR 97/7 summarises various propositions of the Courts about when a loss or outgoing is 'incurred' for the purposes of section 8-1 of the ITAA 1997. The ruling states (at paragraph 5), 'As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape.' The Courts have described this in various ways: as having a 'presently existing liability'; as being 'definitively committed' or 'completely subjected' to the outgoing in spite of the fact that it remains unpaid. Another requirement is that the amount of the liability is ascertained or reasonably capable of estimation. Deductibility under section 8-1 also depends on the outgoing being 'properly referable' to the income year in which the deduction is sought (Coles Myer Finance Pty Ltd v. Federal Commissioner of Taxation (1993) 176 CLR 640; 93 ATC 4214 at 4222; (1993) 25 ATR 95 at 105).

In the present circumstances, you incurred a liability to pay land tax under the provisions of the state legislation at the start of each calendar year for which the land tax was payable. You were 'definitively committed' or 'completely subjected' to the debt at that time, even though unaware of it. As the liability to pay land tax was ascertainable in the year to which the assessment giving rise to the liability relates, land tax payable was incurred in that year (Case B5 70 ATC 24; 15 CTBR (NS) Case 67). The Federal Court confirmed this principle, in the context of payroll tax, in Layala Enterprises Pty Ltd (in liq) v. Federal Commissioner of Taxation (1998) 86 FCR 348; 98 ATC 4858; (1998) 39 ATR 502.

In these circumstances, you incurred the land tax expenses for the purposes of section 8-1 of the ITAA 1997 in each income year for which each land tax liability was payable, and not in the income year in which the arrears were paid.

Please note: Any penalty component of the land tax assessment is not deductible (section 26-5 of the ITAA 1997). You are not entitled to a deduction, otherwise allowable under section 8-1 of the ITAA 1997, for a penalty imposed in accordance with a State law. This is so, no matter how that penalty is described. An interest component of a land tax notice is such a penalty.