Leasehold property and the deductibiIity of stamp duty

The purpose of this paper is to explain the operation of s 25-20 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) and the legal basis for the deductibility of stamp duty on leases if the property is used for the purposes of earning assessable income and to raise awareness of the existence of this important section of the ITAA97. The reason why there is an important need to produce this paper is that over the past few months senior tax agents and accountants working in Victoria and the NT have been asked this question: is stamp duty a deductible expense if the property is being used for income producing purposes in the ACT? The answer has always been a resounding "no". The second question that has been asked is if the investment property is leasehold title and not freehold title, would that make any difference to your answer? The response has also been a resounding "no". The explanation has always been that stamp duty is a capital expense and therefore not deductible, but it becomes part of the cost base for capital gains tax purposes when the investment property is sold. The logical approach that is taken is that stamp duty is a one-off expense and is regarded as being of a capital nature and caught by the first negative limb of s 8-1 of the ITAA97. The accountant or tax agent knows that it will form part of the second element of the cost base for capital gains tax purposes pursuant to s 110-25 of the ITAA97. This view is reinforced bys 110-35(4) where stamp duty is listed specifically as an "incidental cost", namely the second element for cost base purposes. This will always be the correct approach when the interest in the real property that is being used for income producing purposes is freehold and not leasehold.