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Edited version of your written advice
Authorisation Number: 1012743623105
Ruling
Subject: investment property
Question 1
Can you apportion the shared outgoings, namely property rate, land tax, shared maintenance and insurance against the relevant income of each activity of the property on a reasonable basis between the two activities?
Answer
Yes.
Question 2
If two bank loans are used to purchase the property, one loan for the residential house and the small area surrounding it, and the other loan for the remaining farmland can you claim the interest paid on each loan against the respective income earning activity on a proportional basis?
Answer
Yes.
Question 3
If the farming activity was changed so that the farmland was subsequently either leased or fully agisted to a 3rd party at commercial rates would the ATO then regard this property as being one rental property earning a combination of residential rent and farm rent?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts and circumstances
You are looking to purchase an investment property of farmland with a residence.
The residential property would offer short term accommodation for small groups.
Essentially, the property will have two income earning activities being:
• The residential house and the small surrounding land would be used for short term rental accommodation.
• The farming of the adjacent farmland would consist of a variety of activities, which may include: cutting & selling hay, agistment/leasing for animal keeping & the planting a small plantation of inoculated trees for growing and then selling truffles.
The property is being sold as one parcel however you have not yet purchased it.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 6-5
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature.
Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put.
Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income.
Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
The agistment income you receive is considered to be ordinary income and is assessable.
Deductions may be claimed against this agistment income up to the amount of the income received where the expenses directly relate to the receipt of the agistment income. For example if you incur costs to maintain fencing to keep livestock in your property this would be an expense that would be directly attributable to the receipt of the agistment income.
In your situation you intend to purchase an investment property for the purpose of gaining assessable income through various activities. Therefore proportional outgoings in relation to income are allowable deductions.
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