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Edited version of private ruling
Authorisation Number: 1011547173670
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Ruling
Subject: rental deductions
Question:
Can you claim a deduction for costs incurred in relation to your investment property?
Answer:
No.
This ruling applies for the following period
Year ending 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
The scheme commenced on
1 July 2007
Relevant facts
You purchased a rental property.
Your intention was to renovate the property or totally rebuild it but financial problems soon after purchase delayed this.
You obtained quotes each year for the work you wanted to carryout on the property but were never able to afford to have the work done.
You did contribute towards the cost of having a fence constructed between your property and your neighbour.
You also had asbestos removed from the site.
You have incurred council rates, water costs and insurance payments in relation to the property during the period covered by this ruling.
The property is currently listed with a real estate agent for sale.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (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.
The principles in relation to the deductibility of expenses incurred in gaining or producing assessable income have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals.
It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's case), 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 2004/4, 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. While this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future.
While Steele's case deals with the issue of interest, the principles can be applied to other types of expenditure including local council, water costs and insurance payments.
Council rates, water costs and insurance payments on an income producing property are ordinarily deductible under section 8-1 of the ITAA 1997.
In your case, you incurred council rates, water costs and insurance payments in relation to the property. Since purchasing the property, some minor work had been carried out on the property. However, the plan to renovate or rebuild the property has become dormant and your holding of the asset has become passive. The reason for the delay was your financial position and not any factors intrinsic to the property development itself.
Therefore, the expenses you have incurred for council rates, water costs and insurance payments in relation to this property are not deductible as the necessary connection between outgoings and assessable income has been lost.
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