Edited version of private ruling

Authorisation Number: 1011722097811

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Ruling

Subject: Holding expenses-Vacant land

Question

Are you entitled to a deduction for the interest you incurred in respect of your vacant land?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2007

Relevant facts

You settled on a block of land in the year ended June 2007.

You had architectural plans prepared for construction of a substantial house on the land, with the sole intention of renting the property.

You had a detailed costing of the property construction prepared and had approached a bank to provide funding for the building.

Finance was approved subject to a formal application being received.

You had a detailed meeting with two local real estate property managers and decided to defer construction mainly due to the increasing lack of demand for top end, high value rental properties.

Two years later, with the rental market on a downward slide, you placed the land up for sale.

To date very little interest has been shown by potential buyers and the property remains unsold but is still on the market.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Generally, expenses incurred relating to a rental property are deductible under section 8-1 of the Income Tax Assessment Act 1997 if the property is rented or available for rent in the income year in which you claim the deduction.

Taxation Ruling TR 2004/4 considers deductions for interest incurred prior to the commencement of income earning activities and the implications of the decision of the High Court in Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case).

In 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. It follows from Steele's Case that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income if:

· 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.

You purchased your property in the year ended 30 June 2007 with the intention of building a high end rental property. You have had architectural plans and detailed costing prepared and you have approached a bank to provide funding for the construction. You have held a detailed meeting with two local real estate property managers and decided to defer construction mainly due to the lack of demand for high end rental properties.

The deductibility of costs of holding a piece of land on which a rental property was to be constructed was considered in Temelli v. FC of T 97 ATC 4716; (1997) 36 ATR 417 (Temelli's Case).

In Temelli's Case, investors bought a vacant block of land, intending to erect a luxury house on it for rental. They paid some hundreds of dollars to have plans of the proposed house drawn up by an architect, but took no further action towards construction of the dwelling and renting it out. The Federal Court did not allow a deduction for interest and rate expenses incurred on the land, saying at ATC 4721; ATR 422:

Whilst it can be accepted that the acquisition of the Wyuna Court land and the preparation of plans early in 1989 is evidence of some commitment, those steps fall short of a commitment to the income producing element of the project, being the building of the home.

The court contrasted the efforts made by these owners with those made by Mrs Steele, considered by the Federal Court in Steele's Case, quoting the efforts made by Mrs Steele, at ATC 4719, ATR 420:

…she obtained the Council's assent to a change of zoning, employed architects and engineers, entered into joint venture arrangements, and pursued the project with some tenacity until litigation with her collaborator put a complete stop to it. She demonstrated her 'commitment' from the beginning by committing $1,000,000 to the venture plus the time, energy and considerable expense of the subsequent architectural and engineering work, and negotiations with the local Council, sewerage authority and prospective joint venturers and financiers.

This indicates that continuing activity, aimed at eventually producing assessable income is required if the costs of holding a property with the intention of later producing income from it are to be deductible.

The facts in your case can be distinguished from Steele's Case in that a significant amount of work was done in that case in an effort to make the property income producing.

Your case is similar to Temelli's Case in that the only attempts you have made in building a rental dwelling is that you have consulted property managers, had plans prepared and approached a bank regarding funding. You have now placed your land on the market for sale and there is no further evidence of any commitment to building on your land for it to become income producing.

Therefore, you are not entitled to a deduction for interest incurred in respect of your vacant land.

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