| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012712284527
Ruling
Question 1
Is the interest paid on a loan for the investment property deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) during a period that the property is being redeveloped and not available for rent?
Answer
Yes
Question 2
Are other non-capital expenses relating to the investment property, such as council rates, water rates and insurance deductible under section 8-1 of the ITAA 1997 where they are incurred during a period that the property is being redeveloped and not available for rent?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commenced on:
1 July 2014
Relevant facts and circumstances
You jointly purchased a residential investment property (the investment property).
For a period of time, the investment property has been continuously rented through a real estate agent.
During your ownership period, you have had to make numerous repairs to the investment property due to the age of the dwelling.
You became aware of further extensive repairs that would be required to be made to the dwelling in order to continue to rent it to tenants.
You had been limited in the amount of rent you could charge for the investment property due to the age of the dwelling.
Accordingly, rather than complete the extensive repairs, you decided to demolish the dwelling and construct a new dwelling on the property.
The new dwelling will be used for rental purposes from the time that it is available for occupation.
You expect that the new dwelling will be completed and available to be rented approximately 12 months after the last date you received rental income.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital or private in nature (section 8-1 of the ITAA 1997).
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 dealt with the issue of interest on land intended to be developed, the principles can be equally applied to other types of expenditure including council rates, body corporate levies, insurance and electricity incurred during a period repairs and improvements are being carried out to a rental property.
In your case, the expenses you have or will incur in relation to the investment property during the construction period are not considered to have been incurred too soon as they were incurred for the sole purpose of producing assessable income. In addition, there is no private or domestic purpose for holding the property as the property is used for the sole purpose of producing assessable income.
While the income stream from the property will cease for 12-18 months while the redevelopment of the property is undertaken, this period is not considered to have been so long that the necessary connection between the outgoings and the assessable income is lost.
As the property will be made available for rent immediately following the completion of the works it is accepted that continuing efforts will be undertaken in the pursuit of gaining or producing assessable income.
As such, you are entitled to a deduction under section 8-1 of the ITAA 1997 for your share of the interest expenses and other non-capital holding costs (such as council rates, water rates and insurance) relating to the investment property that are incurred during the period that the property is being redeveloped and not available for rent.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
