Edited version of your private ruling

Authorisation Number: 1012430480325

Ruling

Subject: Rental property expenses

Question1

Can interest on a loan used to purchase a rental property off the plan be claimed before the property is income producing?

Answer

Yes.

Question 2

Are borrowing expenses such as lender's mortgage insurance for your proposed rental property able to be claimed over a 5 year period commencing in the year they were incurred?

Answer

Yes.

Question 3

Are costs for conveyancing of your proposed rental property able to be claimed over a 5 year period?

Answer

No.

Question 4

Do costs for conveyancing of your proposed rental property form part of the capital cost base of the property?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You have purchased an investment property which is being built 'off the plan', with building due to commence in less than six months.

The building work will be completed within 12 months of commencement.

You have borrowed a percentage of the purchase price and paid this to the developer who has placed it in an interest bearing account, and the interest will be paid to you after settlement.

You have incurred interest on the investment loan, lender's mortgage insurance, and conveyancing fees

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 25-25 and

Income Tax Assessment Act 1997 Subsection 25-25(1).

Reasons for decision

Loan interest

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.

Interest on funds used to purchase a property on which the taxpayer intends to build an income producing asset may be deductible, from the time of the acquisition of the property (Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139) (Steeles Case). It follows from Steeles 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.

You have incurred interest on a loan for a deposit used to purchase an investment property.

The period of time between your purchase of the investment property and the proposed settlement period is not considered to be so long that the necessary connection between the interest outgoing and the derivation of income is lost.

It is accepted that you are making continuing efforts in pursuit of the construction to be used solely for income producing purposes, as evidenced by the correspondence from your solicitor and the developer to you.

Accordingly you are entitled to a deduction for your share of interest expense relating to this property.

As stated in Steeles Case, the interest on funds used to purchase a property on which the taxpayer intends to build an income producing asset may be deductible, from the time of the acquisition of the property.

Borrowing expenses

You can deduct expenditure incurred in borrowing money to the extent that you use the money for the purpose of producing assessable income (subsection 25-25(1) of the ITAA 1997.

Borrowing expenses are expenses which relate to the actual borrowing of monies. Lender's mortgage insurance, valuation fees and loan establishment fees are borrowing expenses for the purposes of section 25-25 of the ITAA 1997.

The principles in Steele's case can be applied to borrowing costs.

Your borrowing expenses were incurred for the purpose of constructing an investment property that will be used solely for income producing purposes. The borrowing expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity.

Therefore, you are entitled to a deduction under section 25-25 of the ITAA 1997 for your borrowing expenses. However, this section also states that where borrowing expenses total more than $100, the deduction must be spread over the period of the loan or five years, whichever is less. If your borrowing costs exceed $100 and your loan is for more than five years, you must claim your borrowing costs over a five year period from when you incurred the expense.

Conveyancing fees and legal costs

Generally the costs associated with the purchase of a property for income producing purposes are not deductible under section 8-1 of the ITAA 1997, as the expenses are incurred in establishing the profit-making asset and are capital in nature. For example, a deposit bond fee may be paid to protect the vendor of the property in the event the buyer does not pay the deposit on the property.

In your case, you have paid settlement fees for conveyancing to secure your right to purchase a rental property that will be built and used for income producing purposes.

Conveyancing costs are a capital expense associated with the acquisition of an income-producing property and therefore are not tax deductible.

As a capital expense the amount of the conveyancing and legal costs will be added to the cost base of the property for capital gains tax purposes and is used to calculate the capital gain or loss arising on disposal of the property.

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