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Edited version of your written advice
Authorisation Number: 1051362993605
Date of advice: 19 April 2018
Ruling
Subject: Rental property expenses
Question
Are expenses for a proposed rental property deductible until the change of intention from rental to private use?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
You and your partner purchased land on the XX/XX/20XX and settled on XX/XX/20XX
You began construction of a residential building on the land with the intention of using it as a rental property
In mth/20XX you decided that you would move into the house once it was completed
You and your partner moved into the new house in mth/20XX
Relevant legislative provisions:
Income Tax Assessment Act 1936 Section 8-1
Income Tax Assessment Act 1936 Subsection 51(1)
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to deduct from your assessable income any loss or outgoing incurred in gaining or producing your assessable income or necessarily incurred in carrying on a business.
The expenditure will generally be deductible if it has a sufficient connection with the activity which gains or produces the assessable income.
It has been established in the case of Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139 that in order to satisfy subsection 51(1) of Income Tax Assessment Act 1936 (now Section 8-1 of the ITAA 1997) the 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.
This extends not only to interest, but to all expenditure as clarified in Taxation Ruling 2000/17:
‘It is well accepted that expenditure can satisfy the positive limbs of subsection 51(1) even though it is incurred in a period prior to any expected resultant income’
However, if the relevant nexus to an income producing activity is not present, the expenditure does not satisfy the requirements of legislation and therefore will not be an allowable deduction under Section 8-1.
In the case of Steele it was reasoned that:
‘…if a capital asset is not being used to produce the assessable income, although it is accepted that the taxpayer has the intention to use it in that way at some uncertain time in the future, expenditure which is incurred in connection with the capital asset itself may be liable to characterisation as being "of a capital … nature" and thus not an allowable deduction.’
In your case, although you previously intended to utilise the new house as a rental property, your decision to move into the new house removed the necessary connection to your income producing activities. As your new home, the expenditure is not only considered a private expense, but precludes the possibility of using it to gain or produce income as a rental property.
Conclusion
Based on the facts you have provided, the expenses for the proposed rental property do not satisfy the requirements of Section 8-1 of the ITAA 1997 and therefore are not allowable deductions.
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