Edited version of private advice

Authorisation Number: 1052304737871

Date of advice: 12 September 2024

Ruling

Subject: Rental deductions

Question

Can you claim interest, land tax, council rates and water charges where you have demolished the existing rental property and intend on constructing another rental property on the same land?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

The property was acquired with a lease and was tenanted for a number of years.

The property generated fortnightly rent.

Tenants were evicted to vacate the property so knock-down building activities could commence.

A contract with the demolisher was signed.

You intend on constructing another property to rent out.

Rental income will be generated upon completion.

The building of the new property is being funded from savings (no new loan).

The anticipated completion of the build is in a future year.

There are monthly Interest charges from the loan.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 26-102

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Section 26-102(1) of the Income Tax Assessment Act 1997 (ITAA 1997) denies a deduction for losses or outgoings relating to holding land on which there is no substantial and permanent structure in use or available for use. Paragraph 16 of TR 2023/3 states that to be available for use, premises must be capable of being occupied. In the context of residential premises, established residential premises are considered to be available for use unless they have been deemed unsafe to occupy by a council or relevant body.

Subsection 26-102(4), residential premises12 that you construct or substantially renovate are disregarded as a 'substantial and permanent structure' unless they can lawfully be occupied and are leased, hired, or licensed (or available for lease, hire or licence).

'Substantial renovations' is defined in section 195-1 of A New Tax System (Goods and Services Tax) Act 1999 as being:

... renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

Subsection 26-102(4) applies throughout your ownership period of the land. This means that at all times, newly constructed or substantially renovated residential premises must be:

•         lawfully able to be occupied, and

•         either

­   leased, hired, or licensed, or

­   available for lease, hire or licence.

Any holding costs incurred prior to the date that you signed the contract with the demolisher would not be limited by section 26-102. However, the land is vacant land during the knock down and re-build activities as it doesn't contain any substantial or permanent structures. As the property is residential, you cannot deduct any holding costs incurred until the new build is lawfully able to be occupied, rented or available for rent.

Expenses related to holding vacant land, including land on which a residential rental property is either under construction or being substantially renovated, or which has a completed residential property that is not available for rent, are not deductible, regardless of when the land was purchased.

You have demolished the dwelling on the Property and therefore there is no substantial and permanent structure in use or available for use to rent.

You are not able to claim a deduction for interest, land tax, council rates and water charges while the dwelling is being constructed.

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