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Edited version of your private ruling
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Ruling
Subject: Interest expenses
Question
Are you entitled to deduct interest expenses incurred on an 'off the plan' property acquired for future income producing purposes?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2012
Year ending 30 June 2013
The scheme commences on:
1 July 2011
Relevant facts and circumstances
Late in 2011, you and your spouse started looking for an investment property.
Early in 2012, you refinanced your existing loan on your principal residence.
This loan was for $X, broken into two components - $Y for the existing balance on your principal residence, and $Z for investment purposes.
Early in 2012, you exchanged contracts to purchase the intended investment property as joint tenants. The purchase price was $A (of which you paid $B as a deposit).
The balance of $C has remained in the offset account, and you are incurring interest only upon $B.
You anticipate receiving rental income from this property as soon as practical after settlement.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1.
Reasons for decision
These reasons for decision accompany the Notice of private ruling.
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our 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.
It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) 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.
In your case, the expenses are incurred with regard to property to be used solely for income producing purposes. The expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity.
There is no private or domestic purpose for holding the property, your intention is to use the property for income producing purposes.
The length of time between purchase of the property and commencement of construction is not considered to be so long that the necessary connection between the outgoings and the assessable income is lost. You intend to rent out the property as soon as settlement has occurred.
In these circumstances, you are entitled to a deduction for the interest expenses under section 8-1 of the ITAA 1997.
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