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ATO Interpretative Decision

ATO ID 2009/9

Income Tax
Deductibility of expenses: property buyers agent's fee

FOI status: may be released

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.


Issue

For the purposes of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), does a taxpayer who obtains the services of a property buyer's agent to purchase a rental property incur an outgoing in respect of the selection of a property manager where the agent charges the same fee to all clients regardless of whether the selection of a property manager is part of the service provided?

Decision

No. The taxpayer does not incur an outgoing in respect of the selection of a property manager for the purposes of section 8-1 of the ITAA 1997.

Facts

A taxpayer engages a property buyer's agent (the agent) to assist in purchasing a rental property.

The agent identifies properties for sale that meet a client's criteria, evaluates the properties and negotiates the purchase of a property selected by the client. The agent provides this service to home buyers as well as to buyers of rental properties.

The agent advertises its services as delivering substantial net savings to property buyers after its fees are taken into account, due to its special knowledge and understanding of the property market and negotiation skills.

For investor clients, after the selection of a property for sale the agent provides an indicative investment analysis in relation to future capital growth and rental income. The agent may also screen and select a local property manager capable of maximising income from the property.

The agent's fee for the total service is determined on a sliding scale by reference to the price range of the property and is typically about 2 per cent of the purchase price. The fee is not determined on the basis of the amount of time or effort the agent spends in providing the service.

The fee for the total service is the same for a home buyer as for an investment property buyer. The agent also charges the same fee if an investor purchaser does not require the agent to select a property manager.

The agent's invoice is not itemised but for the taxpayer who is an investor client the general description of the total service on the invoice includes 'selection of a property manager'.

The agent estimates that on average about 25 per cent of the time spent in providing the total service is spent on the selection of a property manager where this part of the service is provided.

The agent accepts that to the extent that the agent's fee relates to the acquisition of the property the fee is not deductible by the taxpayer under section 8-1 of the ITAA 1997.

Reasons for Decision

Paragraph 8-1(1)(a) of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income. This means, firstly, that a loss or outgoing must be incurred.

In the present case, it is clear that the taxpayer incurs the agent's fee. What needs to be established is whether any part of that fee constitutes an outgoing in relation to the selection of a property manager. This is a matter of evidence.

On the one hand, the agent provides a total service to the taxpayer which includes the selection of a property manager. Prima facie it appears as though some part of the fee should be attributable to this aspect of the service.

On the other hand, the agent's fee is not calculated on a 'time spent' basis but by reference to the price of the property. Where the price of the property is the same, the agent charges the same fee whether or not the agent selects a property manager for the client. Investor clients and home buyers pay the same fee. Investor clients who do not require the agent to select a property manager pay the same fee as those who do.

The fact that the description of the total service on the invoice refers to the selection of a property manager is not determinative: Federal Commissioner of Taxation v. Broken Hill Pty Co Ltd [2000] FCA 1431; 2000 ATC 4659; (2000) 45 ATR 507, Drummond v. Federal Commissioner of Taxation [2005] FCA 1129; 2005 ATC 4783; (2005) 60 ATR 356.

The evidence indicates that the service for which the agent charges the fee is really the sourcing of a suitable property and the negotiation of the purchase. This conclusion is supported by the way in which the fee is calculated. It is not related to time and effort spent but is determined by what the market will bear. The client is prepared to pay the substantial fee in the belief that the service will provide a net saving on the purchase of the property.

In these circumstances, it can be said that the agent selects a property manager free of charge as an optional and supplementary service to investor clients in order to make the agent's services more competitive. It has a marketing character.

No part of the agent's fee is incurred for the selection of property manager.

Date of decision: 3 February 2009

Year of income:Year ended 30 June 2009

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Federal Commissioner of Taxation v. Broken Hill Pty Co Ltd
   [2000] FCA 1431
   2000 ATC 4659
   (2000) 45 ATR 507

Drummond v. Federal Commissioner of Taxation
   [2005] FCA 1129
   2005 ATC 4783
   (2005) 60 ATR 356

Keywords
Deductions & expenses
Expense apportionment
Real estate related expenses

Date of publication: 13 February 2009

ISSN: 1445-2782

 


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