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ATO Interpretative Decision

ATO ID 2003/113 (Withdrawn)

Rental Property Expenses - bank guarantee in lieu of deposit - deductibility of fees

Attention This ATO ID is withdrawn. Guidance relating to the issue addressed in this ATO ID can be found in the Rental Property Guide (NAT 1729) published to ato.gov.au (QC 23626).
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 24 March 2017.

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for fees paid for a bank guarantee used in lieu of a deposit for the purchase of an investment property?


No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for fees paid for a bank guarantee used in lieu of a deposit for the purchase of an investment property as the expenses are a capital in nature.


The taxpayer entered into a contract with a developer to purchase a property that was being constructed. The taxpayer intended to use the property for income producing-purposes.

The taxpayer applied for a bank guarantee for the deposit amount to secure their rights to purchase the property. The taxpayer's bank subsequently issued a bank guarantee to the developer for the deposit amount.

The taxpayer paid a fee to the bank every 6 months while the bank guarantee was in place.

Reasons for Decision

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, or relate to the earning of exempt income.

The courts have considered a number of cases involving issues related to capital and revenue expenditure. In Associated Newspapers Ltd & Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403, Dixon J considered the issue of what constitutes a capital outgoing and stated that:

   expenditure and outlay upon establishing, replacing and enlarging the profit yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue.

When expenses are paid on a recurring basis, they are often of a revenue nature. However, in Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219; [1981] FCA 9; 81 ATC 4100; (1981) 11 ATR 484, Deane and Sheppard JJ stated that the recurring nature of guarantee fees paid by a debtor to a guarantor:

   would not, as a matter of necessity, preclude their being characterised as outgoings of capital if other relevant factors were, on the assessment of all relevant considerations, found to warrant that conclusion.

The bank guarantee fees were paid by the taxpayer to secure the right to purchase a property that was being constructed for future income-producing purposes. Therefore, the bank guarantee fees are capital expenses associated with the acquisition of the income-producing property and are not deductible revenue outgoings incurred in deriving rental income from the property. The recurring basis of the payments is not a sufficient factor to alter the capital nature of the expenditure.

This can be distinguished from a loan to finance the payment of a deposit. Although a deposit serves a similar purpose to the bank guarantee, that is to secure the right to purchase the property, it also is a partial payment of the purchase price. It is for this second reason that the interest payable under a loan in relation to a deposit may be a deductible expense.

In addition, the fees cannot be considered to be borrowing costs as there is no 'borrowing' for the purposes of section 25-25 of the ITAA 1997.

Accordingly, the bank guarantee fees paid by the taxpayer are capital expenses and are not deductible under section 8-1 of the ITAA 1997.

Note: the cost incurred for bank guarantee fees will form part of the cost base of the guarantee, being the relevant asset acquired, for capital gains tax purposes (refer to subsection 110-25(2) of the ITTAA 1997).

Amendment History

Date of amendment Part Comment
26 February 2016 Reasons for Decision Remove duplicate paragraph.
Insert medium neutral case citation.
  Case references Insert medium neutral case citation.

Date of decision: 26 November 2002

Year of income:Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 8-1
   section 25-25
   section 110-25
   section 110-25(2)

Case References:
Associated Newspapers Ltd & Sun Newspapers Ltd v. Federal Commissioner of Taxation
   (1938) 61 CLR 337
   [1938] HCA 73
   (1938) 5 ATD 87

Ure v. FC of T
   (1981) 50 FLR 219
   [1981] FCA 9
   81 ATC 4100
   (1981) 11 ATR 484

Siebel/TDMS Reference Number: CW3135740; 1-7K3O17H; 1-AZZADM7

Business Line: Individuals

Date of publication: 15 March 2003

ISSN: 1445-2782

2003/113 history   Top  
   Date   Version 
   26 November 2002   Original statement   
   26 February 2016   Updated statement   
 You are here ®  24 March 2017   Withdrawn   


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