Consultancy fees not deductible as rental property expenses
Posted by Northadvisory on November 9, 2018
As a general rule, expenses incurred by a taxpayer for the purpose of earning assessable rental income will be deductible, provided they are not private or capital in nature, and that they are not explicitly excluded from deduction.
Practitioners should be reminded that expenses that could be deducted as revenue expenses may include:
- advertising for tenants
- body corporate fees
- borrowing expenses
- capital allowances (depreciation on plant)
- council rates
- gardening/lawn mowing
- interest on loans
- land tax
- legal fees
- pest control
- property agent fees/commission
- repairs and maintenance
- capital works deductions
- stationery, telephone and postage
- water charges, and
- sundry rental expenses.
For capital gains tax (CGT) purposes, the cost base (or reduced cost base) of a property could be made up of the following amounts expended by the owner on the property at the time of acquisition, during the period of ownership, and at the time of disposal under s 110-25 of ITAA 1997:
- the purchase price of the rental property
- incidental costs which are not otherwise allowable as a deduction, eg the cost of surveyors, valuers, agents, advertising, accountants, brokers, consultants and legal advisers, marketing costs, and the cost of the transfer
- costs of owning the property (if acquired after 20 August 1991) that are not otherwise allowable as a deduction
- capital expenditure that has been made to preserve or enhance the value of the property which has not otherwise been allowed as a deduction to the taxpayer, eg the capital cost of extensions, and any initial maintenance costs relating to pre-existing faults, and
- capital expenditure to establish, preserve or defend the taxpayer’s title to, or right over the property, eg legal expenses associated with establishing good title to the property.
However, fees incurred to assess the financial situation of taxpayers with a portfolio of investment properties may not be deductible as rental property expenses nor contribute to the cost bases (or reduced cost bases) of the residential properties.
Relevant facts and circumstances
Two taxpayers borrowed funds to acquire investment properties and then rented them out to generate rental income. The value of their portfolio had depreciated in recent years. They also incurred significant costs to service their debts and other out-of-pocket expenses relating to the properties.
The taxpayers engaged a consulting firm to consider the financial viability of their portfolio and reassess their financial situation in general. The consulting firm would prepare a strategic plan, and negotiate and liaise with relevant secured creditors to improve the taxpayers’ financial situation.
The ATO ruled that the consultancy fee was neither a revenue expense nor a capital expense relating to the rental properties.
The fee was not deductible as an expense incurred in gaining or producing assessable income under ITAA 1997 s 8-1. It was a private expense that related to the taxpayers’ financial situation in general, rather than their rental income.
Similarly, the fee could not be included in the cost bases (or reduced cost bases) of the taxpayers’ properties for CGT purposes. This is because the fee related not just to the rental properties but the taxpayers’ financial position in general, and the fee did not fall within any of the five elements of the cost base under s 110-25 of ITAA 1997.
If you have any questions about claiming rental property expenses as a tax deduction , please do not hesitate to contact us.
T: 02 9984 7774