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Edited version of your private ruling
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Ruling
Subject: Rental property expenses
Question
Are you entitled to a deduction for interest and other holding costs?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You purchased a block of land a number of years ago with the intention of building an investment property.
You then lost your job and could not afford to build on the land.
Later you took action to commence constructing the property, including getting plans.
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) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
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. 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 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 also be applied to other types of expenditure including local council, water and sewage, rates, land taxes and emergency services levies.
While you may have intended to build an investment property on the land, you did not take action on that intention until early 2012. Continuing efforts were not undertaken and the period was so long that the necessary connection between the outgoings and producing assessable income has been lost. It is considered that the expenses were incurred at a point too soon to be incurred in producing assessable income from the property.
Therefore, you are not entitled to a deduction for expenses related to holding the land.
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