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TAX & BUSINESS
Deductible Advertising Expenses for Building Demolition
Where the acquisition of an old building and its demolition are linked to the generation of tax-relevant income, the lost expenses for the old building constitute advertising expenses.
When so‑called building‑right contracts (Baurechtsverträge) are concluded over land, they grant the building‑right holder the right to erect a structure on someone else’s land. Where the land is already built upon, it may be necessary for the building‑right holder to demolish the existing building. If, at that point, there is still a residual book value of the demolished building in the accounts, the question arises to what extent this can be tax‑wise utilised by the civil‑law owner of the land. In a recent decision, the Administrative Court (Verwaltungsgerichtshof, VwGH) addressed this question.
Depreciation of the residual book value over 15 years
In 2015 a landowner concluded a preliminary agreement for a building‑right contract. The (future) building‑right holder was to carry out, as agreed, the demolition of the still‑standing building and bear the costs. In 2016 the building was first demolished and a few months later the building‑right contract was signed. For the years 2016 to 2019 the landowner declared rental and leasing income from the building right. At the same time he claimed, as advertising expenses for the demolished buildings, the depreciation of a residual book value, which he spread over 15 years.
This depreciation was not recognised by the tax administration and the Federal Fiscal Court (Bundesfinanzgericht, BFG) also dismissed the appeal. The BFG stated that no causal link with the income from the building right existed, because the buildings were not part of the granting of the building right.
Decision of the VwGH
The VwGH first explained that advertising expenses are expenses or outlays incurred for the acquisition, securing or preservation of income. From the definition of advertising expenses it follows that the decisive factor is the causal link between the expense or outlay and the income. In contrast to the BFG, however, the VwGH found such a causal link in the present case.
The VwGH has previously, in a similar factual situation, recognised that the authority granted by the civil‑law owner to the building‑right holder to demolish the old building cannot be assigned to a tax‑irrelevant sphere, if the demolition of the old building is carried out for the purpose of generating tax‑relevant income from the granting of a building right on the cleared site. Where the acquisition of the old building and its demolition are linked to the generation of tax‑relevant income, the lost expenses for the old building constitute advertising expenses.
The VwGH also saw such a link in the present case. Because of the binding preliminary agreement for a building‑right contract, the demolition of the buildings on the contract‑related land by the building‑right holder was clearly linked to the generation of future income from the building rent. The removal of the buildings was, in fact, a prerequisite for concluding the building‑right contract.
Depreciation of the residual book value over 15 years
In 2015 a landowner concluded a preliminary agreement for a building‑right contract. The (future) building‑right holder was to carry out, as agreed, the demolition of the still‑standing building and bear the costs. In 2016 the building was first demolished and a few months later the building‑right contract was signed. For the years 2016 to 2019 the landowner declared rental and leasing income from the building right. At the same time he claimed, as advertising expenses for the demolished buildings, the depreciation of a residual book value, which he spread over 15 years.
This depreciation was not recognised by the tax administration and the Federal Fiscal Court (Bundesfinanzgericht, BFG) also dismissed the appeal. The BFG stated that no causal link with the income from the building right existed, because the buildings were not part of the granting of the building right.
Decision of the VwGH
The VwGH first explained that advertising expenses are expenses or outlays incurred for the acquisition, securing or preservation of income. From the definition of advertising expenses it follows that the decisive factor is the causal link between the expense or outlay and the income. In contrast to the BFG, however, the VwGH found such a causal link in the present case.
The VwGH has previously, in a similar factual situation, recognised that the authority granted by the civil‑law owner to the building‑right holder to demolish the old building cannot be assigned to a tax‑irrelevant sphere, if the demolition of the old building is carried out for the purpose of generating tax‑relevant income from the granting of a building right on the cleared site. Where the acquisition of the old building and its demolition are linked to the generation of tax‑relevant income, the lost expenses for the old building constitute advertising expenses.
The VwGH also saw such a link in the present case. Because of the binding preliminary agreement for a building‑right contract, the demolition of the buildings on the contract‑related land by the building‑right holder was clearly linked to the generation of future income from the building rent. The removal of the buildings was, in fact, a prerequisite for concluding the building‑right contract.