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Edited version of your written advice

Authorisation Number: 1012763219072

Ruling

Subject: rental deductions

Question

Are you entitled to a deduction for interest, council rates, and water rates for the period the property was not rented?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You own a rental property.

Your tenant abandoned the property and caused damage to the property.

You have been unable to rent the property for a period of X months while repairs and court proceedings have taken place.

Once the property has been repaired and the legal action resolved the property will be available for rent.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (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, or relate to the earning of exempt income.

In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steeles 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 Steeles 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:

While Steele's Case deals with the issue of interest, the principles can also be applied to other types of expenditure including local council, water and sewage, rates, land taxes and emergency services levies.

Taxation Ruling TR 2004/4 discusses at paragraph 36, the concept of 'continuing efforts' and states that the concept of continuing efforts should not be taken to require constant on-site development activity. It adds further:

In your circumstances you have commenced legal proceedings to terminate the tenancy, recover unpaid rent and seek damages for the required repairs. Consequently we consider that there has been continuing efforts in making the property available for rent. Therefore the interest expense and holding costs such as council and water rates will remain deductible under section 8-1 of the ITAA 1997.


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