Edited version of your private ruling

Authorisation Number: 1052428932587

Date of advice: 31 July 2025

Ruling

Subject: Deductions - vacant land and construction of new premises.

Question 1

Are you entitled to a deduction for the loan interest expenses incurred from DDMM20YY when the initial loan was established?

Answer

No.

Question 2

Are you entitled to a deduction for the loan interest expenses incurred from DDMM20YY to DDMM20YY, prior to the first drawdown of the construction element of the loan?

Answer

No

Question 3

Are you entitled to an apportioned deduction for the loan interest expenses incurred from DDMM20YY, following the first drawdown of the construction element of the loan?

Answer

Yes.

Question 4

Are you entitled to a deduction for council rates expenses incurred from when you acquired the vacant land up until the dwelling was legally able to be occupied DDMM20YY?

Answer

No.

Question 5

Are you entitled to claim a deduction for the loan interest expenses incurred on the total loan monies borrowed from DDMM20YY?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20YY

The scheme commenced on:

DDMM20YY

Relevant facts and circumstances

You and your spouse purchased a residential block of vacant land (the Property) on DDMM20YY for $XX

It was your intention to construct a dwelling for investment purposes on the vacant land.

You each hold 50 % ownership in the Property.

Loan 1 Investment property loan (for land only)

You took out a loan of $XX to partially finance the vacant land purchase. This loan was active from DD MM 20 XX until DDMM20YY.

You subsequently obtained a loan to finance the purchase of the land and construct the dwelling.

Loan 2 Investment Property Loan (for land and construction)

You borrowed $X apportioned below:

   •   $X allocated to the vacant land purchase to refinance the existing loan

   •   $X allocated to construction costs.

You have been incurring interest on the loan.

Construction

Construction commenced on DDMM20YY.

Construction drawdowns from the loan occurred on the following dates: (drawdown dates omitted)

Completion and handover date for construction occurred on DDMM20YY.

You rented out the Property from DDMM20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-102

Reasons for decision

Summary

From 1 July 2019, deductions are limited for losses or outgoings that relate to holding vacant land. Some exclusions apply. You cannot claim a deduction for interest expenses to acquire vacant land.

You are entitled to an apportioned deduction for the loan interest incurred in relation to the construction of the dwelling prior to the dwelling being lawfully available for rent. Council rates are holding costs associated with the vacant land and are not deductible until the new dwelling can be lawfully occupied and is available for lease.

Interest expenses incurred on the total loan monies borrowed (land and construction costs) can only be deducted from the date the Property is lawfully able to be occupied and is available for lease. For more information on interest deductions relating to rental properties, search QC 101711 at ato.gov.au.

Detailed reasoning

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.

Expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction. Interest on loan used to purchase a property which is rented or available for rent is an allowable deduction under section 8-1 of the ITAA 1997.

Taxation Ruling 95/25 ('TR 95/25 ') Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view on the deductibility of interest expenses following the Full Federal Court decision in FC of T v. Roberts; FC of T v. Smith 92 ATC 4380; (1992) 23 ATR 494 (Roberts and Smith).

The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income.

Paragraph 3 of TR 95/25 sets out the general principles relevant to the question of whether interest is deductible under section 8-1 of the ITAA 1997:

   •   There must be a sufficient connection between the interest expense and the activities which produce assessable income. The test is one of characterisation, and the essential character of the expenses is a question of fact to be determined by reference to all the circumstances.

   •   The character of interest on money borrowed is generally ascertained by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower (the 'use' test).

   •   Regard must also be had to all the circumstances, including the objective purpose of the borrowing and the nature of the transaction or series of transactions of which the borrowing of funds is an element. In some cases, your subjective purpose, intention or motive may be relevant (the 'purpose' test).

Broadly, subsection 26-102(1) 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.In certain circumstances you may be excluded from the operation of the section, such as if the land is used in carrying on a business^, you lease the land to an entity carrying on a business, the land is held by primary producers^, or you are a particular kind of entity.There are other exceptions to this section. However, the operation of these exceptions is not addressed in this Ruling.

Leaving aside business, entity, or primary production exclusions, 3 tests determine whether the section applies to a land holding:

   •   Is there a substantial and permanent structure on the land?

   •   If there is a structure, is it in use or available for use?

   •   If there is a structure available for use, is it independent of and not incidental to the purpose of any other structure, or proposed structure on the land?

A substantial structure is significant in size, value, or some other criteria of importance in the context of the property.To be permanent, a structure needs to be fixed and enduring.

In the context of section 26-102, we do not consider the costs of repairing, renovating, or constructing a structure on the land, or any interest or borrowing costs (to the extent they are associated with repairs, renovation or construction), to be a loss or outgoing related to holding land.

Questions 1 and 2

Interest expenses incurred on vacant land

The operation of section 26-102 and paragraph 14 of Taxation Ruling TR 2023/3 Income tax: expenses associated with holding vacant land means that your intention to use the property to derive rental income is no longer sufficient by itself to claim a deduction for expenses where no income can be derived because the property is either not able to be occupied or not available for rent.

See Example 2 at paragraph 14 - residential vacant land in TR 2023/3

   14.   Lien owns a vacant block in a residential area on which she intends to build a rental property. The block is fenced on 3 sides and has a small shed. Lien stores tools and equipment in the shed to maintain the block. The fence and shed are not substantial and permanent structures with a purpose that is independent of any other proposed structure on the residential block. They exist to support the use and function of the proposed rental property. For the purposes of subsection 26-102(1), the land is considered vacant and deductions for the costs of holding the land are denied.

In your case, at the time the relevant interest expenses were incurred, you were not using the vacant land in carrying on a business, nor were you leasing the land to an entity carrying on a business. You were also not an entity of the type specified in section 26-102 of the ITAA 1997your initial construction loan drawdown was not made until DD MM20XX. This means you cannot claim a deduction for interest expenses incurred between DDMM20YY and DDMM20YY, because these interest expenses are considered to be the cost of acquiring and holding vacant land.

Question 3

Interest expense for multiple purposes

Where the land loan and construction loan are combined, a deduction will only be available for the element of the loan interest and other borrowing costs that relate to the construction of the dwelling and the interest expenses will need to be apportioned.

See Example 6 at paragraph 27 - interest expense for multiple purposes in TR 2023/3

Example 6 - interest expense for multiple purposes

   27.   Giovanna takes out a mortgage to purchase a vacant block of land in September 2019. Giovanna intends to build a house on the land (which she will rent out). Giovanna does not carry on a business. Giovanna takes out a separate loan for the construction of the house. Giovanna will not be able to claim a deduction for her interest expense which relates to acquiring the land until the house is lawfully able to be occupied and leased or available for lease. If a deduction is otherwise available for the construction loan interest expense, Giovanna will not be prevented from deducting the expense by section 26-102.

In your case, you are entitled to an apportioned deduction for the loan interest incurred for the construction of the dwelling from DDMM20YY (the date of the initial construction loan drawdown).

Questions 4 and 5

Loss or outgoing relating to holding land - council rates and new construction

Pursuant to subsection 26-102(4), residential premises 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). 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.

See Example 5 at paragraph 23- new construction

   23.   Harry purchases vacant land on 1 July 2019 and builds a house on the land. He obtains an occupancy certificate on 9 February 2020. Harry lists the property with a real estate agent for lease on 1 March 2020. Any holding costs that Harry would otherwise be entitled to deduct from 1 March 2020 will not be denied by section 26-102, as from this date the house is lawfully able to be occupied and is available for lease.

In your case, council rates and other holding costs can only be deducted from the date the property is lawfully able to be occupied and is available for lease, which is DDMM20YY. Further, this means you can claim a deduction for interest expenses incurred on the total

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