Bonaccordo and Commissioner of Taxation

[2009] AATA 385

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 385

ADMINISTRATIVE APPEALS TRIBUNAL      )   

)    No: 2008/2885 to 2887

TAXATION APPEALS DIVISION  )   

ReMario BONACCORDO

Applicant

And    Commissioner of Taxation

Respondent

DECISION

TribunalThe Hon Brian Tamberlin QC, Deputy President

Date28 May 2009

PlaceSydney

DecisionThe decision under review is affirmed.

................[sgd]..............................

The Hon Brian Tamberlin QC
  Deputy President

CATCHWORDS – INCOME TAX - whether a deduction is allowable to the Applicant in respect of his rental property for expenses incurred in gaining or producing assessable income - no actual letting of the property in this case – practical commercial commonsense approach to be adopted to the question of whether genuine attempt was made to rent the property – Applicant did not make a genuine attempt - decision under review is affirmed.   

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RELEVANT ACT/S:

Income Tax Assessment Act 1997 (the Act): ss 8-1, 51

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CITATIONS

Ure v Federal Commissioner of Taxation (1981) 87 11 ATR 484

Inglis v Federal Commissioner of Taxation (1987) 87 ATC 2037

Case V133 (1988) 88 ATC 847

Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1

Re Ormiston and Federal Commissioner of Taxation (2005) AATA 978

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REASONS FOR DECISION

28 May 2009	The Hon Brian Tamberlin QC, Deputy President
Basic facts

1.      This is an application for review of a decision of the respondent refusing in full claims by Mr Mario Bonaccordo to include interest and rental deductions in respect of premises at 31 Hillcrest Road, Quakers Hill, New South Wales which were under s 8-1 of the Income Tax Assessment Act 1997 (the Act), for the income years ended 30 June 2005, 2006 and 2007.

2.      Section 8-1 of the Act provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital or private or domestic in nature.  Expenses incurred in relation to a rental property are deductible if the property is rented or available for rent in the income year in which the deduction is claimed.  In general, property may be considered to be held for the purpose of gaining or producing set assessable income in circumstances where it is tenanted, or has been listed with an agent or agents as being available for tenancy and/or where the owner is making active efforts to rent the property.  These indicia, of course are not the only circumstances which can lend some support to a claim that expenses are deductible in relation to a rental property.  Every case must be considered on its factual circumstances in order to make a proper determination.

3.      The issue presently before this Tribunal is whether the claimed expenses in each of the three years by way of interest and other expenditure are deductible.

4.      The claims in the present case in respect of deductions for the rental property can be summarised as follows:

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Year ended	Interest deductions	Other rental deductions
30 June 2005	$ 34,999	$ 5,101
30 June 2006	$ 34,562	$2,423
30 June 2007	$ 33,957	$6,388

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Background

5.      The applicant made a detailed statement in which he set out the relevant circumstances.  He is currently employed by Pepe's Ducks Pty Limited (the Company) and has been so employed as a manager since 1994.  The Company is a family business owned by his father and is involved in the breeding and raising of ducks for commercial purposes.  The Company previously operated its business from 33 Hillcrest Road, Quakers Hill, which adjoins the subject premises at 31 Hillcrest Road.  He currently lives at 33 Hillcrest Road with his father.  The Company no longer operates the business at this address but his father often houses a small genetic flock of ducks belonging to the Company at this address for experimental purposes.  Mr Bonaccordo is engaged in implementing policies, procedures and organisational structures for operating units within the framework of corporate policy and ensuring compliance of the factory operation with corporate objectives.

6.      In August 2003, Mr Bonaccordo became aware that the property at 31 Hillcrest Road was for sale.  It was then owned by an elderly lady who was going to move into a retirement village.  In early 2004, he made enquiries in relation of the property, which is located close to shopping centres, infrastructure and public transport.  He says that he considered its potential to produce an additional source of rental income.  The property has an area of .66 acre and has a 40.22 m frontage to Hillcrest Road.  The surrounding area is zoned residential.  He obtained a housing loan in the amount of $500,000.  The bank undertook a valuation of the property and estimated its worth at $1.2 million.  The purchase price was $1.1 million and it was agreed with the vendor that she could remain living in the property rent-free for a period of six months after the date of settlement, which took place on 5 March 2004.  Mr Bonaccordo stated his intention was to rent the property as soon as possible after purchase.  He says he visited several local real estate agents to ascertain the level of rent that was being advertised for similar properties and that he carried out internet property searches to ascertain the level of rent on similar properties.  In the loan valuation of the bank there is reference to a rental value of $180 per week.

7.      Mr Bonaccordo says that he did not list the property with a real estate agent because he wanted to remain in control of the property as he had privacy concerns and did not want to pay a real estate agent to erect a sign.  In November 2004 he arranged for a sign to be constructed advertising the property as available for rent and erected it at the front of the property in view of the public, setting out the details of the property.  In early December, he had a call from a Ms Vicki Petho about renting the property.  In late December, he had a telephone discussion with her and he expressed concern because she had pet budgerigars and he was afraid that domesticated birds could carry strains of viruses which were highly contagious and could be readily transmitted to the small genetic flock of ducks at 33 Hillcrest Road that were kept for poultry trial purposes.  These birds were from time to time later introduced into the larger flocks of many thousands of birds.  His concern was that if the ducks at No 33 became infected then it could lead to a major operating trading loss as a consequence of destruction of the Company's stock when the trial poultry were mixed with the other poultry stock.  He says it was for that reason that he did not want to rent the premises to Ms Petho or anyone else who came into contact with birds.  Also, in May 2005 he received an enquiry from a Mr Houston for rental of the property but that did not proceed because the house on the property was too small to accommodate Mr Houston’s family.

8.      During the period May 2005 to 30 June 2007 Mr Bonaccordo says that he received two or three enquiries to rent the property but none of them led to the property being rented.  Also during this period he had personal difficulties with his family and with company business including the divorce of his parents.  This caused him great stress and he had to work extra hours, which he says delayed his search for a suitable tenant for the property.

9.      In about August 2007 and due to the lack of enquiries over the previous years he made enquiries with Raine and Horne, estate agents of Summer Hill, as to the possible market rent he could obtain for the property.  He received a three-line letter confirming that the market rent would be approximately $200 per week.  This enquiry was after the end of the relevant financial periods.  It does not appear from the evidence whether these agents ever inspected the property.  No other efforts appear to have been taken by them.

10.     It is not clear from the evidence how long the sign erected for Mr Bonaccordo remained on the property or whether it was removed at some stage before 30 June 2007.  There were no enquiries whatsoever as to rental of the property in the period after 15 May 2005 to 30 June 2007 so it is apparent that the sign was not effective.

Legal principles

11.     There is no substantial dispute between the parties as to the applicable legal principles.  Rather, the dispute goes to the application of those principles to the facts and circumstances of this case.  In Ure v Federal Commissioner of Taxation (1981) 11 ATR 484 at 489 Brennan J observed that the purpose for which money is laid out is a question of fact turning on the objective circumstances which human experience would judge to be relevant to the issue. His Honour noted the necessity to connect the expenditure with the purpose of gaining assessable income. However, the outgoing must be found to produce the assessable income or if none is produced it must be shown that the expenditure could reasonably be expected to produce assessable income. One guideline when considering the purpose of the expenditure claimed as a deduction is to determine whether the property was “genuinely available for rent”: see Inglis v Federal Commissioner of Taxation (1987) 87 ATC 2037 at (71)-(72) where Deputy President Todd said:

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While it is true that the property was vacant and theoretically available at all times, it cannot be said to have been truly available for letting unless some perceptible effort was being made to obtain tenants in respect of those times, or at least some step taken to draw its availability to the attention of the public, the classic method of so doing being the placing of it with an agent.  The sufficiency of the steps taken is a question of fact to be decided in each case, but in this case, considering the irregular advertising and the restriction of the opportunity of renting to Canberrans, there has in my view been insufficient done for it to be able to be said that the property was available for letting for periods adequate to support the claims made. …(Emphasis added)

12.     In that case, in contrast to the present case, there had in fact been an actual letting of the house for a substantial period of up to 12 weeks in the years in question.  In addition, in each year there had been a substantial number of advertisements ranging from 16 to 20 per annum offering the property for letting.  The Deputy President nevertheless disallowed the claim for rental deductions as sought by the taxpayer and considered that it was clear from the evidence that the objective purpose of the borrowings in question was for a private purpose and not for the production of income at the property and that the claim was therefore not made out.

13.     Some guidance can also be obtained from the decision of Senior Member McMahon in Case V133 (1988) 88 ATC 847, where he referred to the measures taken by the owner to let the premises and which led him to the conclusion that the case was one where there was strong and verifiable evidence of efforts to support the purpose of letting. The applicants in that case were believable and their evidence was supported and corroborated in all relevant details by objective evidence. By all tests evolved for deciding whether expenditure falls within the first limb of s 51, the Senior Member considered that the applicants ought to succeed. By way of illustration as to the types of steps that can be taken to evidence genuine efforts to rent property, at (7) the Senior Member of observed that:

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Before the house was finished, he had it inspected by a local agent and commenced to advertise it extensively for letting.  A selection of advertisements and promotions was tendered in evidence.  These included display advertisements inserted in newspapers, such as The Land and Open Road, as well as in the daily newspapers and in specialised journals, such as Qantas News.  There were also tendered letters which the husband had written to companies associated with the proposed aluminium and power developments in an endeavour to interest those companies in taking block bookings for their employees.  The property was also listed with several real estate agents, including the agent in Sydney that managed the wife's unit.  Over the period of two years after the house was built, evidence was given that approximately $2,000 had been spent in advertising.

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14.     In that case the Senior Member was not seeking to set out a series of definitive tests but rather to describe the evidence which led him to the conclusion in that particular case.  It cannot be said that these matters are required to be established in any particular case but they do provide an indication as to the type of steps which might be taken to rent premises.  At (16) the Senior Member referred to the overwhelming evidence of the commercially realistic approach adopted by the applicants in their search for tenants.  This reflects the importance of adopting a practical commercial commonsense approach to determination of the question of whether sufficient and genuine attempts were made to rent the property so as to provide the necessary connection with the production of rental income.  This emphasis on the need for a common sense appreciation of the overall factual context in which the outgoings are incurred was expressed by the High Court in its unanimous decision in Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 20. The court in that case also referred to the need for the expenditure to be genuinely and not colourably incurred in gaining or producing assessable income.

Reasoning

15.     The applicant's case is that the question of sufficiency of steps taken by a taxpayer and to make a property available to rent is a question of fact to be decided afresh in each case.  It is accepted by the applicant that in order for a property to be considered available for rent there must be evidence of active and bona fide attempts to let the property.  The cases provide some support for the proposition that the listing of a property with a real estate agent is usually to be expected as part of a bona fide attempt to make a property available for rent but it is not a mandatory requirement to establish the required bona fides.  Nor is there any judicial or a legislative requirement for the level of effort required in making the attempt to rent premises.  The requirement is rather that there must be some perceptible effort to attract tenants, which is a relatively low threshold.

16.     The applicant relies on the decision in Re Ormiston and Federal Commissioner of Taxation (2005) AATA 978 where the Senior Member considered that the deductions claimed by an applicant who had not leased the subject property during the four financial years in which deductions were claimed, was entitled to a deduction. In reaching this conclusion, the Senior Member considered the subjective features of the property including its initial unsuitability for use as a rental property and the need for extensive refurbishment. In that case, no rental income had been obtained from the property in the years in question. However, Mr Ormiston contended that his intention had been and continued to be to bring the investment property to a state where it could be let and generate income for the future use to produce income. Evidence as to intention was accepted as to the expectation to have the investment property available for rental after modest renovations within a maximum period of two years. But, in that case there had been an inspection by two local real estate agents for an estimate of potential rental, and Mr Ormiston gave sound reasons for the very substantial delay in implementing his plans to bring the building to a rentable state. The Senior Member could see no other purpose for borrowing the money and the incurring of interest and other costs. He found the delay was caused by the inexperience of Mr Ormiston and the lack of proper planning together with the problems in his personal life. This case turned on the particular facts concerning the circumstances of Mr Ormiston and did not set out any general guidelines as to the evidence required to establish the required purpose of the expenditure.

17.     The applicant in this case submits that the program of commercial trial breeding of ducks at No 33 next to the subject property at Quakers Hill was a subjective matter, which provided an explanation for the applicant’s reluctance to allow a real estate agent to control the process of letting the property.  This he said, also explains the difficulty in securing a suitable tenant arising from the fear of avian disease, which could have a disastrous effect on the extensive business of raising and preparing large numbers of ducks for slaughter and marketing.  His concern was that if a prospective tenant came in contact with birds, for example household pets, which had an avian disease, this disease could be spread to his trial birds on the adjoining premises at No 33 Hillcrest Road where he resided and this could spread to the larger flocks and destroy his business as a result of health regulations.

18.     The applicant also relies on the fact that he erected one laminated sign which could be seen from the street, advertising the property and he says this was erected on 7 November 2004.  It led to a small number of inconclusive enquiries and he had some contact with a real estate agent to obtain a market rent appraisal.  However, this request for an appraisal did not take place until after the income years in question. It occurred in August 2007 arising from the lack of enquiries that he was receiving in relation to the property and the fact that he was losing money on the investment.  There is no explanation as to why this realisation did not come earlier except that he had been under some personal stress as a result of the divorce of his mother and father in May 2003 and the pressure off long hours of work.  He notes that emotional difficulties were accepted as a reason for the delay in letting the premises in Ormiston (supra).  Another matter to which he refers is the fact that the block was very large, being two thirds of an acre and that there could be considerable maintenance required in looking after the large amount of open lawn.  He considered this was a deterrent to potential lessees.

19.     I am not persuaded that the apprehension by the applicant of the perceived dangers arising from possible bird disease and infection of the ducks the subject of his family business is a satisfactory explanation as to why he did not seek the assistance of an agent in renting the premises.  Nor am I satisfied that there is any reasonable explanation for the failure to make substantial efforts over the three financial years to find suitable tenants and derive income from the premises.

20.     In considering these submissions, it should be noted that in fact no income was ever obtained from the premises in the years in question or at all.  The premises were never listed with a real estate agent.  Nor were any advertisements made by a real estate agent or the applicant.  The only objective and overt act taken by the applicant was to place a sign in front of the property.  The evidence is unsatisfactory as to how long this sign remained on the premises.  The sign apparently attracted a few enquiries but nothing came of these.  The applicant took no other significant steps to advertise the property.  There was some suggestion that there may have been some word-of-mouth indication that the premises were available, but this was vague in the extreme.  Except for the continued residence of the aged vendor for several months after the sale, the property remained vacant for the entirety of the period under review.  This is not a case where the premises required any repairs to make it suitable for letting.  It was in a well-developed and desirable location close to transport, schools and other community facilities.  It is fair to say that following the erection of a sign the applicant did not make any clear efforts regarding the property until one month after the expiry of the three-year period when he met with Raine and Horne to obtain an opinion as to possible market rent.

21.     Having regard to the above considerations and in the circumstances of this case I am not satisfied that the assessments issued for the years ended 30 June 2005, 2006 and 2007 were excessive or that the expenses claimed were deductible.  More specifically I do not consider that the applicant took sufficient efforts to indicate that the property was available to rent and I am not persuaded that the purpose of any of the expenditure was to produce income.

22.     Accordingly, the decision under review should be affirmed.

I certify that the 22 preceding paragraphs are a true copy of the reasons for the decision herein of The Hon. Brian  Tamberlin QC, Deputy President

Signed:   .......................[sgd]..................................................
               Associate

Date/s of Hearing:  12 May 2009
Date of Decision:  28 May 2009
Solicitor for the Applicant:                  J Brown, Mathews Folbigg Lawyers
CSolicitor for the Respondent:          M Cosgrove, ATO Legal Services Branch