Edited version of private ruling

Authorisation Number: 1011591681565

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Ruling

Subject: Rental property expenses - interest

Are you entitled to a deduction for the interest incurred on an investment property

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

The scheme that is the subject of this ruling

You obtained an investment loan to purchase an investment property.

You made the property available for rent.

Due to the condition of the property you were unable to tenant the property.

You have been making renovations to improve the likelihood of tenanting the property.

The property has been made available for rent.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states 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.

Interest on funds used to purchase a property from which the taxpayer intends to derive income may be deductible, from the time of the acquisition of the property (Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steeles case)) under section 8-1 of the ITAA 1997. It is not necessary to show that the interest was incurred in producing income of a particular year. Expenses that are otherwise deductible are not excluded from deductibility simply because no assessable income was derived in the relevant year.

The Commissioner limits the operation of Steele's case to circumstances where:

· the interest is not preliminary to the income-earning activities. In other words, it is not incurred too soon

· the interest is not of a private or domestic nature

· the period prior to the derivation of income is not so long that the required connection between the outgoings and income is lost

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

· continuing efforts are undertaken in pursuit of that end.

In your case, the expenses were incurred on funds borrowed for the purchase of the investment property. The existing residence was advertised for rent but due to the condition of the property was unable to be tenanted. Improvements have been made to it prior to it being readvertised for rent.

Your intention was to use the property for income producing purposes once the improvements had been completed. In these circumstances it is considered that the interest expenses were not incurred at a point too soon, and were not preliminary to the commencement of the income earning activity. The length of time between purchase of the property and completion of improvements to the property is not considered to have been so long that the necessary connection between the interest outgoings and the assessable income is lost. Furthermore there is no private or domestic purpose in the purchase.

Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for loan interest expenses incurred in relation to the purchase of the property.

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