ATO Interpretative Decision

ATO ID 2001/478 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. Guidance on the basis of the decision in this ATO ID can be found in Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can the taxpayer claim a deduction under section 25-25 of the Income Tax Assessment Act 1997 (ITAA 1997) for borrowing expenses to fund the purchase of land and the construction of a house for future income producing purposes?

Decision

Yes, the taxpayer can claim a deduction under section 25-25 of the ITAA 1997 for borrowing expenses to fund the purchase of land and the construction of a house to be used for future income producing purposes.

Facts

The taxpayer purchased land and intends to complete the building of a house on the land within 12 to 18 months.

The taxpayer borrowed funds to purchase the land and construct the house.

Borrowing costs were incurred prior to the commencement of construction of the house.

The taxpayer intends to use the property to produce rental income.

Reasons for decision

Section 25-25 of the ITAA 1997 allows a deduction for certain borrowing expenses. Where the total borrowing costs exceed $100, the claim must be apportioned over the period of the loan or five years, whichever is the lesser.

Borrowing expenses such as procuration fees, legal expenses, stamp duty on the mortgage, valuation and survey fees associated with the borrowing are deductible to the extent that the borrowed monies are actually or intended to be used during the income year for income producing purposes.

It is not necessary, however, that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; [1999] HCA 7; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) concludes 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:

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The interest is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities;

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The interest is not private or domestic;

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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;

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The interest is incurred with one end in view, the gaining or producing of assessable income; and

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Continuing efforts are undertaken in pursuit of that end.

While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including borrowing costs.

The borrowing expenses are incurred with regard to the purchase of land and the construction of a house that will be used solely for income producing purposes. The borrowing expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity.

There is no private or domestic purpose for holding the property, the taxpayer's intention was always to build an income producing property.

The length of time between purchase of the property and completion of construction is not considered to be so long that the necessary connection between the outgoings and the assessable income is lost. The taxpayer intended to complete construction within 12 to 18 months of the purchase of the land.

In these circumstances, the taxpayer is entitled to a deduction for borrowing costs under section 25-25 of the ITAA 1997. The borrowing expense deduction will be spread over the period of the loan or five years whichever is the lesser.

Amendment History

Legislative References:
Income Tax Assessment Act 1997
   section 25-25

Case References:
Steele v. Deputy Commissioner of Taxation
   (1999) 197 CLR 459
   [1999] HCA 7
   99 ATC 4242
   (1999) 41 ATR 139

Related Public Rulings (including Determinations)
TR 2004/4

Related ATO Interpretative Decisions
ATO ID 2001/479

Keywords
Acquisition of real estate
Deductions & expenses
Expenses of borrowing
Potential residential land
Real estate related expenses
Rental expenses
Potential residential land

Business Line:  Small Business/Individual Taxpayers

Date of publication:  17 October 2001

ISSN: 1445-2782