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This edited version has been archived due to the length of time since original publication.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: 1012738008634

Ruling

Subject: Rental - deductions - expenses after property condemned

Question

Are you entitled to a deduction for rental property expenses incurred after the property was condemned?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

You own a rental property from which you have earned assessable income.

The property suffered damage as a result of a weather phenomenon, and was condemned making it uninhabitable.

You lodged an insurance claim however it was rejected.

You are seeking legal advice in relation to the insurance claim and the insurer's decision not to pay the claim.

If you are able to recover insurance proceeds you intend on demolishing and rebuilding the building, and continue to use it as a rental property.

It is unlikely that you will have the financial capacity to commence demolition and rebuilding in the near future without the insurance proceeds.

It is unlikely that you will demolish the building whilst fighting the insurer for fear of losing evidence in the case against the insurer.

Your intention was to continue to use the property as a rental property indefinitely had the damage not occurred.

You are still incurring bank interest, rates and other holding expenses relating to the rental property.

You do not have the ability to pay out the rental property loan.

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 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.

Taxation Ruling TR 2004/4 examines the deductibility of interest after the cessation of the income earning activities. You may still be entitled to a deduction for recurrent interest expenses incurred after the cessation of your previous income earning activity. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period.

However, the nexus between the interest expense and the relevant income earning activities will be broken where:

The nexus between the expenses and the relevant income earning activities has not been broken, as you do not have the ability to repay the loan and it is not a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities.

Therefore the expenses relating to the rental property will continue to be deductible after the property has been condemned.

Whilst you have decided to delay the demolishing of the building until an outcome of the legal action is determined, it will not impact on the deductibility of the expenses provide the above nexus isn't broken.

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).