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Edited version of your written advice
Authorisation Number: 1013044540577
Date of advice: 7 July 2016
Ruling
Subject: Rental property expenses
Question 1
Can you claim interest and holding costs as deductions in respect of your rental property when it is not ready to be leased?
Answer
Yes.
Question 2
Can you claim a capital works deduction in respect of your rental property prior to it being ready to be leased?
Answer
No.
Question 3
Can you claim a capital works deduction in respect of your rental property after it was ready to be leased?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You purchased a rental property with the intention of renting the property to tenants.
The property required renovation before it could be rented.
There was a dispute over the work you wanted to undertake.
Once the work was completed you had difficulties renting the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 43-10
Income Tax Assessment Act 1997 Section 43-140
Income Tax Assessment Act 1997 Section 43-160
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.
Taxation Ruling TR 2004/4 provides the Commissioner's view on the deductibility of interest incurred prior to the commencement of the relevant income earning activities. This ruling is considered to be equally relevant to other holding expenses incurred prior to the commencement of income earning activities such as rates and insurance. The ruling considers the implications of the decision of the High Court in Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case).
In 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 the finding in 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 if:
• 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.
It is accepted that the interest and holding expenses incurred are allowable deductions in terms of section 8-1 of the ITAA 1997.
Question 2
Section 43-10 of the ITAA 1997 allows a deduction for capital works that are used for one of the purposes set out in section 43-140 of the ITAA 1997.
Section 43-140 of the ITAA 1997 permits a deduction for other capital works, which includes a rental property where it is used for the purpose of producing assessable income.
Section 43-160 of the ITAA 1997 establishes that you are only able to claim a deduction for capital works during a period that the property was actually rented or is available for rent.
Therefore a deduction for capital works is not allowable under section 43-10 of the ITAA 1997 until your property was available for rent.
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