The payments can be claimed as allowable deductions either under the general or specific provisions of the Income Tax Assessment Act 1997(Cth) (ITAA) dealing with deductions.

Section 8-1(1) a is to the effect that a taxpayer can deduct payments made in gaining or producing assessable income. This means that the payments must satisfy this requirement as a prerequisite. It would appear from the wording of the section that the payment sought to be deducted should have some nexus with earning assessable income.

As the building project is not expected to commence in the current tax year, the question arises as to whether the payments made are deductible given that they are only preliminary to the eventual business into which you intend to venture. In Softwood Pulp and Paper Ltd v FC of T[1], it was held that preliminary expenses are only deductible if the taxpayer has committed himself completely to the business at the time the expenses were incurred. You have already commenced plans to gain approval for the proposed development and have even paid architects to develop preliminary plans. Both initiatives show that you are already committed completely to the business and as such can claim the payments even though they are only preliminary. This position is buttressed by section 40-880 ITAA 1997 which allows a taxpayer to deduct costs incurred over 5 years in relation to a proposed business. Assuming the project comes into existence within 5 years, the payments would be deductible.

Preliminary expenses such as the current ones would also be deductible if the intention at the time of purchasing the property is to derive long term rental income as was held in Ormiston v FC of T.[2]This amply fits matches your scenario as your intention is to eventually earn rental income.

[1] 76 ATC 4439

[2] 2005 ATC 2340

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