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Edited version of your written advice
Authorisation Number: 1012719242138
Ruling
Subject: Rental property expenses
Question
Are you entitled to a deduction for expenses relating to the holiday property for the 2013-14 financial year?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You purchased an investment property as a holiday rental in June 2013.
You have undertaken repairs and maintenance work during the 2013-14 financial year.
You did not list the property for rent with an agent. You relied on word of mouth among friends.
You stayed in the property on some weekends while you were undertaking the repairs.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-10
Reasons for decision
Under section 8-1 of the Income Tax Assessment Act 1997, rental expenses such as interest are deductible to the extent to which they are incurred in gaining or producing assessable income or carrying on a business for that purpose and is not of a capital, private or domestic nature.
Interest is not normally a capital outgoing because it is a recurrent expense which does not secure an "enduring advantage"; rather, it simply secures the use of borrowed money during the term of the loan.
In determining the deductibility of interest, the courts and tribunals have looked at the purpose of the borrowings and the use to which the borrowed money has been put.
Taxation Ruling TR 2004/4, in considering the above decision, 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. While this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future.
Where a taxpayer purchases a property with the intention of deriving income, a deduction for interest and other expenses may be available even if no income is derived, such as in Ormiston v. FC of T 2005 ATC 2340 (Ormiston's case).
Following the decision in Ormiston's case, the Tax Office's view continues to be that set out in TR 2004/4. Where taxpayers claim deductions for rental properties in which no or minimal rental income has been derived, they may be asked to demonstrate that they purchased the property with the intention of deriving rental income and that they continue to hold it for that purpose. In the usual case, taxpayers would demonstrate that they held the property with the intention of deriving rental if they provide documentation or other evidence to show that the property has been genuinely available for rent and that they have taken reasonable steps to find tenants and to generate rental income.
Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not deductible.
You have provided a letter from a real estate agent which states that the property was available for rent from the time it was purchased. However, you advised that you did not list it for rent with an agent during the 2013-14 financial year. You further state that you relied on word of mouth among friends.
In your case, you have not taken reasonable steps to find tenants and to generate rental income. The expenses you incurred for interest and holding costs are considered to be incurred at a point too soon. Furthermore, the cost of the repairs is considered to be initial repairs, and as such, is capital in nature.
Therefore, you are not entitled to a deduction for any expenses relating to the property in the 2013-14 financial year.
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