ATO response
I have applied for a private ruling and the answer is not part of the cost base, not deductible.
I am very disappointed with the quality of the explanation which appears to be a cut and paste job and does not leave me any clearer as to the correct answer, particularly as to why there are some widely varying private rulings on this subject.
Quotes from the ruling explanation:
The courts have considered the meaning of ‘incurred in gaining or producing assessable income’. In Ronpibon Tin NL Tong Kah Compound NL v. Federal Comissioner of Taxation (1949) 78 CLR 47; 56 ALR 785; 8 ATD 431 the High court stated that:
For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words “incurred in gaining or producing the assessable income” mean in the course of gaining or producing such income.
The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible (Federal Commisioner of Taxation v. Maddalena (1971) 45 ALFR 426; 2 ATR 541; 71 ATC 4161).
….. The expenses will be incurred before the properties are income producing, that is, before the properties are available for rent.
The courts have found that holding costs such as local council, water and sewerage rates… etc, may be deductible as they are inherent costs of owning the property. However the cost of travel is not inherent and is not a cost of owning the property.
According these expenses are preliminary expenses. …. As these expenses are regarded as being private in nature, they do not form part of the cost base…
No specific mention of Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele’s Case) is given.
There is then an additional explanation of why the travel is not part of the cost base, which is basically a copy and paste of the elements of the cost base, which specifically states that the travel is not part of the fourth element.
The explanation regarding why the travel costs are not part of the cost base is clearly copied and pasted from out of date information.
From the ruling explanation:
4. The fourth element of the cost base includes capital expenditure you incurred to increase an asset’s value, such as the construction of a veranda. The expenditure must however be reflected in the state or nature of the asset at the time of the CGT event…
By looking at the ATO’s “Guide to capital gains tax 2005-2006” at
http://www.ato.gov.au/individuals/content.asp?doc=/content/66269.htm&page=19&H19, it is clear that the text in the ruling explanation has been taken from pre 1 July 2005 documentation. The updated guide, sections of which are shown below, states not that the expenditure
must however be reflected in the state or nature of the asset, it clearly states that
some expenditure that may not have been reflected in the state or nature of the asset, may possibly be included in this element.
From the ATO’s “Guide to capital gains tax 2005-2006”
Fourth element: capital costs to increase or preserve the value of your asset or to install or move it
The fourth element is capital costs you incurred for the purpose or the expected effect of increasing or preserving the asset’s value – for example, costs incurred in applying (successfully or unsuccessfully) for zoning changes. It also includes capital costs you incurred that relate to installing or moving an asset. However, it does not include capital expenditure incurred in relation to goodwill which may be deductible as a business-related cost. For details see Guide to depreciating assets 2006.
Note
For CGT events that happened before 1 July 2005, the fourth element was capital costs associated with increasing the value of your asset that were reflected in the state or nature of the asset at the time of the CGT event – for example, if you paid for a carport to be built on your rental investment property. The effect of the change is to broaden the range of costs that are included in this element, including some expenditure that may not have been reflected in the state or nature of the asset when it was sold – for example, certain demolition costs. If the CGT event (such as sale or disposal) happens on or after 1 July 2005, costs that fall within the new description of this element are included irrespective of whether they were incurred before or after that date.
The ruling ignores the question of whether travel costs related to installing a depreciating item (eg the carpets and blinds) can be included as part of the cost of that item. The ATO “Guide to depreciating assets 2006”, mentioned in the updated Fourth Element details above, provides an example where travel costs to purchase a car are included in the cost of the car.
In private ruling 51783, the ATO has ruled that travelling to make a progress inspection on a rental property under construction was fully deductible. This ruling is based on Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele’s Case). I also stated that I would be travelling to the property for the purpose of making a progress inspection, and there are no other relevant differences in my circumstances that would give a reason for a different ruling. Either ruling 51783 is incorrect (in which case ruling 51783 should be removed from the ATO web site), or the ruling given in my case is incorrect.
It would appear that the ATO has a policy of not responding to any questions regarding why other private rulings with almost identical circumstances have different outcomes. I referenced private ruling 51783 in my request but this was ignored.
I am thinking of lodging an objection to this ruling based on the cost base explanation being based on outdated information, and because they have not addressed whether the cost of travel to install a depreciating item can be added to the cost of a depreciating item. I will also mention ruling 51783, and see if they will give me some explanation of this.
