Tax non-deductibility of expenses for the repair of non-business property owned by the taxpayer
In its judgment (file no. 8 Afs 204 / 2019-42) of March 2021, the Supreme Administrative Court ("SAC") upheld the procedure of the tax administrator, which excluded from tax deductible expenses the costs of repair and maintenance of non-commercial property. What exactly was the judgment about?
As part of the tax audit, the Tax Office assessed the tax to the taxpayer of personal income tax (lessor of a guesthouse and related facilities) for the tax period from 2011 to 2013, from expenses incurred by the taxpayer for repairs, maintenance and operation of real estate (land) included in his business assets, but the taxpayer considered these expenses to be incurred in achieving, securing and maintaining income, thereby reducing the resulting tax base.
The tax administrator concluded that the taxpayer only made the buildings of the guesthouses part of his business assets within the meaning of Section 4 (4) of Act No. 586/1992 Coll., on Income Taxes (the "ITA"). The taxpayer did not prove the registration of the related land. The reclaimed expenses related to the repair, maintenance and operation of these other properties (not included in the commercial property) and were therefore reclassified in accordance with Section 25 (u) ITA as tax non-deductible.
However, the taxpayer argued that there are facilities on the disputed real estate that are used by accommodated clients or are rented together with guesthouses (sports ground, tennis court, sauna, swimming pool, parking, bike shed, ski room). He therefore considered the expenses incurred on these properties to be expenses for achieving and maintaining taxable income. He also supported his reasoning with the content of the website from 2011 to 2013, which shows that the taxpayer also offered services located on the disputed land as part of the accommodation. He also referred to the 2009 tax audit, which did not call into question the expenditure on the repair and maintenance of the disputed land and the cost of the property tax and left the expenditure in question as tax-deductible. The taxpayer further argued that if the expenses related to the property were recorded in the tax records (as evidence he provided copies of data from his books), the property in question is a commercial property.
Judgment of the Supreme Administrative Court
In the context of the described case, the following provisions of the ITA are crucial to assess the tax-deductibility of the claimed expenses.
- Section 4 (4) of the ITA
- for the purposes of personal income tax, commercial property means the sum of property values (things, receivables and other rights and valuables) owned by the taxpayer and which have been or are accounted for or are or have been stated in the records of assets and liabilities for the purposes of determining the tax base and income tax.
- Section 25 (1) (u) ITA
- expenditures (costs) incurred for achieving, securing and maintaining income for tax purposes, in particular, cannot be recognised as expenses for the personal needs of the taxpayer; including expenses incurred for the repair, maintenance or technical improvement of assets used for business or other self-employed activities, which the taxpayer referred to in Section 2 ITA does not include in commercial assets pursuant to Section 4 (4) ITA.
Therefore, if you, as an entrepreneur, want to classify your assets as business assets, you must start accounting for them or keep them in your tax records ("TR"). However, the SAC emphasised that asset accounting (TR management) does not in itself prove the inclusion of things into commercial property for income tax purposes. What is or is not subject to tax is not determined by accounting regulations, but by the ITA.
In addition to accounting (TR management), an important criterion for determining the entrepreneur's business assets is also their nature and the way they are handled. The property of a natural person doing business can in principle be of a dual nature: property used for personal needs and property intended for business. It is therefore necessary to proceed from the principle that commercial property according to the ITA can only be such property of the entrepreneur that is related to his or her business activities and is therefore actually used in this context.
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