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Ruling

Subject: Land interest and holding expenses

Question

Can you claim a deduction for the loan interest, rates and other holding costs on your vacant block of land?

Answer

No

This ruling applies for the following periods

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2007

Relevant facts

You purchased a vacant block of land over four years ago for the purpose of building a rental property. You are paying interest on a loan for the land and also have rates and other holding expenses.

Shortly after settlement you had a builder's layout done for a prospective home on the land, which was not the final draft, or suitable to lodge for building approval.

You then moved interstate for employment.

The housing market where you purchased your land has dropped since you purchased, and you have had the land on the market to sell for 18 months.

Because of building costs and the real estate market you have taken no further steps since the builder's layout was done to construct a rental property on the land.

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) 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.

Expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 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. Taxation Ruling TR 2004/4 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 Steele's case deals with the issue of interest, the principles can be applied to other types of expenditure including local council, water and sewerage rates, land taxes and mowing.

However, in Temelli v. FC of T 97 ATC 4716; (1997) 36 ATR 417 (Temelli's case), it was found that the temporal hiatus left open the possibility of some purpose other than gaining or producing assessable income to such an extent that the required nexus did not exist.

The interest did not have a sufficient connection with the prospective income producing activity of rental of the proposed residence. The taxpayers did not have the requisite degree of commitment to the income producing activity or the income producing element of the project. Through to the end of the year of income, the issue was whether, and if so when, a residence would be built for income earning purposes.

You purchased the block of land over four years ago.

Apart from the builders layout plans that you had done shortly after settlement, your circumstances are similar to those of Temelli's case in that no steps have been taken to advance the intention of building the rental property and you have not shown that continuing efforts have been undertaken.

Taking into account the period of time since purchase of the land and that you have not yet undertaken activities to progress the building of a rental property, it is considered that the necessary connection between the outgoings and the assessable income has been lost.

Therefore, you are not entitled to claim a deduction for interest, rates or other holding expenses relating to the land.

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