ATO Interpretative Decision
ATO ID 2001/307 (Withdrawn)
Income TaxInterest expense - vacant land held for future income producing use
FOI status: may be released
This ATO ID is withdrawn as the interpretative issue is covered in Taxation Ruling TR 2004/4.This document has changed over time. View its history.
Status of this decision: Decision Withdrawn 4 November 2005
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Is interest on a loan, taken out to fund the purchase of vacant land held for future income producing use, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes, interest on a loan taken out to fund the purchase of vacant land held for future income producing use is deductible under section 8-1 of the ITAA 1997.
The taxpayer borrowed funds and purchased land with the intention of constructing an income producing dwelling. That intention remained constant during the time of the taxpayer's ownership of the property.
The taxpayer incurred interest expenses on the borrowed funds.
For financial reasons, the taxpayer was unable to commence actual development of the property for a four year period.
In that time the taxpayer saved for the construction, viewed display homes, progressed the building design and discussed the concept with colleagues.
Four years after the land was purchased the taxpayer engaged a builder. The property was built over a period of eight months. The house was then let to tenants.
Reasons for Decision
Section 8-1 of the ITAA 1997 provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature.
In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139, the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. Taxation Ruling TR 2000/17, in considering the above decision, 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:
- the interest is not incurred "too soon", is not preliminary to the income earning activities and is not a prelude to those activities;
- the interest is not private or domestic;
- 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;
- the interest is incurred with one end in view, the gaining or producing of assessable income; and
- continuing efforts are undertaken in pursuit of that end.
In the taxpayer's case, the interest was incurred on borrowed funds used to acquire a property that was solely intended to be used in income earning operations. In these circumstances the interest expense is not considered to have been preliminary or incurred at a point "too soon" before the commencement of the income producing activity.
Furthermore, the taxpayer's intention throughout was to build an income producing building and there was no private or domestic purpose for holding the property. The taxpayer was committed to the project and took steps to develop the property prior to construction by saving money and planning and designing the building. The length of time between purchase of the property and commencement of construction is not considered to have been so long that the necessary connection between the interest outgoings and the assessable income is lost.
In these circumstances the taxpayer is entitled to a deduction for the interest expense under section 8-1 of the ITAA 1997.
Income Tax Assessment Act 1997
Steele v. FC of T
(1999) 197 CLR 459
99 ATC 4242
41 ATR 139
Related Public Rulings (including Determinations)
Deductions & expenses