Edited version of private ruling

Authorisation Number: 1011501933485

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Ruling

Subject: Interest expenses

Are you entitled to a deduction of interest expenses incurred on a bank loan taken out purely for the purposes of a deposit on a property which is not yet producing income?

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You are purchasing an off the plan residential single unit for investment purposes.

The property will be used purely for investment purposes as a rental property and will not be used for private purposes.

The property will be rented at market rates.

You are required to pay a deposit to the developer in the 2010-11 income year prior to settlement.

The deposit will be held in trust.

Settlement is due in the 2011-12 income year.

You will need to secure a bank loan for the deposit.

The balance will be borrowed from the bank on settlement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

As you have mentioned, 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.

Taxation Ruling 2004/4 looks at deductions for interest incurred prior to the commencement of, or following the cessation of relevant income earning activities. It states that the deductibility of interest is generally determined through an examination of the purpose of the borrowing and the use to which those borrowed funds are put.

In addition the ruling points out 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:

· 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.

When we apply the above conditions to your circumstances it is clear that:

· as you are purchasing off the plan, you are required to secure the property by paying a deposit and settlement is not to occur until later in the 2010-11 income year, the interest will not be incurred too soon

· the interest expenses will not be private or domestic as you have stated that the unit will be used purely for investment purposes as a rental property

· for the reasons outlined above, the necessary connection between the outgoings and assessable income is not lost

· the interest will be incurred with one end in view; that of gaining assessable income, and

· given that the you have purchased off the plan, and you have a settlement date, continuing efforts are under way in pursuit of that end.

Accordingly, as the loan is being used to acquire a property purely for investment purposes you are entitled to claim a deduction for the interest expenses you incur in relation to that loan.