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Edited version of your private ruling
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Ruling
Subject: Interest on investment loan
Question
Are you entitled to a deduction for all interest incurred on a loan, from the date the deposit was drawn down to purchase land for the purpose of building a rental property?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
The scheme commences on:
1 July 2008
Relevant facts and circumstances
You obtained a borrowing.
You drew down a deposit to acquire a parcel of land in your name only off the plan from a developer to build an income producing rental property.
Shortly after paying the deposit you contracted a builder to build on the land.
Due to developer delays with the subdivision approval and completion, settlement didn't occur until some time later. Building of the rental property commenced soon settlement of the land.
The building was completed and made available for rent approximately 12 months after settlement.
You incurred interest from the date the borrowings were drawn down to fund the deposit.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital 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 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 where:
· 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 you purchased a parcel of land off the plan from a developer with an intention to build an income producing property.
You had no control over the delays caused by the developer and building commenced shortly after the settlement date. Therefore there is no private or domestic purpose for holding the property.
As the expenses you incurred in relation to the property were incurred solely for income producing purposes, they are not considered to have been incurred at a point 'too soon' prior to the commencement of the income producing activity.
Interest incurred on joint loan
Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put.
Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. The character of a new loan which refinances a previous loan follows from that previous loan: Taxation Ruling TR 95/25
In your situation, it is accepted the interest is referable to the land purchase and development of the rental property, and is therefore incurred in the production of your assessable income. Accordingly you are entitled to a deduction for all interest incurred on the loans.
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