ATO Interpretative Decision

ATO ID 2001/479 (Withdrawn)

Income Tax

• This ATO ID is withdrawn because the ATO view on this issue is included in Rental properties 2016 under the heading Expenses prior to the property being available for rent .
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can the taxpayer claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for rates and other holding costs incurred on a vacant block of land held for future income producing purposes?

Decision

Yes. The taxpayer can claim a deduction under section 8-1 of the ITAA 1997 for rates and other holding costs incurred on a vacant block of land held for future income producing purposes.

Facts

The taxpayer purchased land and intends to complete the building of a house on the land within 12 to 18 months of purchase.

The taxpayer intends to use the property to produce rental income.

The taxpayer incurs local council, water and sewage rates, land taxes and emergency services levies with regard to the property prior to the completion of the building of the house.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances:

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The interest is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities;

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The interest is not private or domestic;

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The period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost;

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The interest is incurred with one end in view, the gaining or producing of assessable income; and

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Continuing efforts are undertaken in pursuit of that end.

While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including local council, water and sewage rates, land taxes and emergency services levies.

The expenses are incurred with regard to property to be used solely for income producing purposes. The expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity.

There is no private or domestic purpose for holding the property, the taxpayer's intention was always to build an income producing property.

The length of time between purchase of the property and commencement of construction is not considered to be so long that the necessary connection between the outgoings and the assessable income is lost. The taxpayer intended to complete construction within 12 to 18 months of the purchase of the land.

In these circumstances, the taxpayer is entitled to a deduction for expenses such as local council, water and sewage rates, land taxes and emergency services levies under section 8-1 of the ITAA 1997.

Amendment History

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Steele v. Deputy Commissioner of Taxation
   (1999) 197 CLR 459
   99 ATC 4242
   (1999) 41 ATR 139

Related Public Rulings (including Determinations)
Taxation Ruling TR 2004/4

Related ATO Interpretative Decisions
ATO ID 2001/478

Keywords
Deductions & expenses
Local government rates & taxes expenses
Potential residential land
Real estate related expenses
Rental expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  17 October 2001

ISSN: 1445-2782