Edited version of your private ruling

Authorisation Number: 1012557745447

Ruling

Subject: rental property expenses

Question 1

Are you entitled to a deduction for 100% of your rental property expenses during the period the property was being constructed?

Answer

No.

Question 2

Are you entitled to a deduction for a portion of your rental property expenses during the period the property was being constructed?

Answer

Yes.

Question 3

Should your deduction for rental property expenses, while the property is available for rent, be apportioned based on the amount of non assessable non exempt (NANE) income you receive from the property?

Answer

Yes.

Question 4

Are you entitled to a deduction for a portion of the costs incurred to obtain an insurance valuation and market rental assessment?

Answer

Yes.

Question 5

Are you entitled to a deduction for the costs incurred to draw up the rental agreement?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on

1 July 2012

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· The application for private ruling received, and

· The documents provided with the application for private ruling.

You and your spouse purchased land with the intention of building an investment property.

Units were built on this land.

You and your spouse incurred expenses for interest, rates and other expenses while the property was being built.

You and your spouse entered into an agreement.

You and your spouse incurred a fee to draw up an agreement to allow the property to be used under a Government scheme.

The agreement is for a term of X years. As part of the agreement, the rent payable by tenants must be less than the market value.

The market value is reviewed on several occasions over the term of the agreement.

The property manager organises these reviews and you and your spouse are required to pay for the assessment of the market rent.

You and your spouse incurred a fee for an insurance valuation and market rent assessment.

During the period the units were being built, you and your spouse were not entitled to receive any government payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(2)

Income Tax Assessment Act 1997 section 110-35

Reasons for decision

Questions 1, 2 and 3

Section 8-1 of the 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 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.

Subsection 8-1(2) of the ITAA 1997 states you cannot deduct a loss where the outgoings are of a capital, private or domestic nature, or incurred in producing NANE income.

It is generally accepted that expenses incurred in respect of a rental property are considered to be incurred in the course of gaining or producing assessable income and are therefore deductible.

Apportionment of expenditure is necessary where it serves both an assessable income producing end and some other end: (Ronpibon Tin NL v FC of T (1949) 8 ATD 431).

While derivation of assessable income by way of rent is one objective achieved by participation in the government scheme, the receipt of government incentives, including state government NANE income is another. The costs associated with making your property available as under the government scheme would need to be apportioned to reflect the derivation of associated assessable income and NANE income.

Interest and holding costs incurred in respect of the rental dwelling must be apportioned, limiting a claim for any deduction to the portion of costs relating to the derivation of assessable income.

Generally this apportionment of expenses would be made using the following formula to calculate the percentage of deductible expenses:

A x B

B+C

A = Otherwise deductible expenses

B = assessable rental income derived from the property

C = NANE income associated with the property

Application to your circumstances

In this case, the interest and other costs were incurred with a view to produce assessable income and NANE income. It was the intention from the outset that the property would be rented in line with the government scheme requirements.

Therefore, you are only entitled to a deduction for a portion of the expenses incurred both before and after the property was available for rent.

For the period prior to the production of assessable income and NANE income, it would be appropriate to estimate the amount of income you would have received if the property had been rented out to determine the portion of expenses that are deductible.

Question 4

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income.

In your case, you incurred costs for an insurance valuation and market rent assessment in relation to your rental property. A portion of these expenses are deductible under section 8-1 of the ITAA 1997. The formula discussed above can be used to determine the deductible portion of this expense.

Question 5

In your case, a fee was paid to the organisation set up to provide houses for investors to build and be part of the government scheme. This fee was incurred in relation to the acquisition of the property. Therefore, the fee is considered to be a capital expense and specifically excluded as a deduction under section 8-1 of the ITAA 1997.

The expense would be included, however, under the second element of the cost base for CGT purposes which includes the incidental costs incurred to acquire the CGT asset or that relate to a CGT event that happens in relation to the asset. These incidental costs include:

· professional fees including the remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser

· costs of transfer

· stamp duty and other similar duty

· costs of advertising or marketing (but not entertainment) for a buyer or seller

· valuation or apportionment costs for CGT purposes

· search fees relating to a CGT asset (such as fees to check land titles and similar fees, but not travel costs to find an asset suitable to purchase)

· the cost of a conveyancing kit (or similar cost), and

· borrowing expenses (such as loan application fees and mortgage discharge fees).

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