Tax Tip 362: Stamp Duty in ACT when Moving into Property that was rented out

ACT land is leasehold land and the stamp duty on the ‘purchase’ of a property relates to the transfer of a lease.

From a tax point of view this is different to the stamp duty on the transfer of land and has different legislation dealing with it.

See

Tax Tip 136: Claiming Stamp Duty on Properties located in the ACT (Part 1) Tax Tip 136: Claiming Stamp Duty on Properties located in the ACT (Part 1)

S25-20 ITAA97 applies to costs associated with leases and this section says the duty can be deductible where it relates to an investment property.


But what about the situation where someone buys a property and rents it out for one year and then moves in – can they claim the duty in full or would it need to be apportioned?


This is covered in:

ATO ID 2012/36

Income Tax

Lease Document Expenses: deductibility when a property used partly for the production of assessable income

https://www.ato.gov.au/law/view/document?docid="AID/AID201236/00001"

Unfortunately, this ID doesn’t really tell us much, other than ‘will use’ in section 25-20(2) ITAA97 does not refer to the intention when the duty is incurred.

“Therefore, in circumstances where there is a change in use following acquisition part way through the income year, such that the premises are not wholly used for income producing purposes, an apportionment of the stamp duty outgoing which is reasonable in the circumstances is required under subsection 25-20(2) of the ITAA 1997.”


From this it is likely the ATO will want to apportion the claim for stamp duty if the purchaser moves into the property in the same financial year as it was purchased and it is rented out initially.

But when the property is moved into in the following or subsequent tax years apportionment may not be needed.


Example

Homer gets a job in the Commonwealth Government and moves to Canberra. He buys a property on 1 Jan which settles 2 Feb, but it has tenants on a fixed lease and is rented out until 1 July when Homer moves in.

Homer could potentially claim the full duty on the purchase as the property was a rental during that financial year with no private usage.


Example 2

Bart follows his dad down a bit later when Homer manages to get him a job in the public service. Nepotism doesn’t exist in the public service and Bart got the job on his own merits.

Bart buys a property on 1 July, but this also has a tenant with 6 months to go and Bart doesn’t move in until 1 Jan, with a hangover from the public service new year’s party where they were drinking beer from a prosthetic leg.

Bart has lived in the property for 50% of the financial year so it is likely Bart could only claim 50% of the duty on the property because the property was rented for 50% of the first year.


Anyone contemplating this should seek their own tax advice.

 

I dont agree with example 2. the duty is incurred at the time of transfer and it was used on that date to produce income in example 1. But in example 2 the duty was incurred when it was rented (ie actual use as indicated in the ruling) so 100% should be fully deductible and Barts later use isnt relevant. One problem with ACT duty is deductibility for an intended rental property. If Bart moves in and expects to rent it out three days later its not deductible as the actual use was private ON the taxing date and that is the crux of that ruling. We see this with land tax too. ACT duty and state land tax is incurred ON the taxing date not over a period of time. If the property was a former home until 30 December and was a IP for just 24 hours or even half a day its its taxed and as its reneted its deductible but if the opposite occurs and the tenat vacates on 24 december and the new owner is taxed (fails the 6 onths rule) then its a tax due BUT is not deductible. There is no need to consider the period to which it relates eg "a 2021 tax year" as it is incurred at a specific point in time (NSW midnight 31 December).

We see this with

• Land tax
• Loan break costs

However annual charges like council rates tc need to be apportioned based on the date range and the period when it was rented so that only the portion that relates to the rented-use days is claimed.

This example is also specific to the ACT as it is leasehold and stamp duty MAY be deductible in the ACT unlike other states where it is a capital cost.

 

That would appear to be contrary to what the ATO say in ATO ID 2012/36:

“Therefore, in circumstances where there is a change in use following acquisition part way through the income year, such that the premises are not wholly used for income producing purposes, an apportionment of the stamp duty outgoing which is reasonable in the circumstances is required under subsection 25-20(2) of the ITAA 1997.”

 

Hmmm thanks for making me aware of that view. I am not sure I would agree in full and cannot detremine any contrary decisons and appeals Objections may be private.

I think after consideration what they are saying and to that extent I would likely agree is......In plain english..... The duty is incurred based on a lease. So rather than being incurred AT a point in time they consider the duty applies to the lease term being transferred. The lease duration matter is considered rather than the use at a point in time. So if use changes then the deductibility of duty may be impacted. Then the further complication is the ID is really about actual not intended use. The ID governs a intended v actual change of use which is not quite the same view but I agree the ATO does create some issue to adderess. And the case extract of "It would be an incongruous outcome were a deduction available merely by reference to intention at the time an outgoing is incurred. If that were the test, a change in intention immediately following incurrence would entitle a deduction even though the property was never put to an income producing use" may address the counterpoint view. However over what time duration must the taxpayer consider this ??

I would query that issue and duration however. In its simplest form a change of use could be short eg tennat vacates aftre a few days, a few weks, a month, 6 months, 12months, 2 years ? . However what time period does the ATO consider ?

I would argue it may be a issue where taxpayer need to exercise caution and consider even a private ruling where actual use is initially rental production and then that changes or is expected to change.