| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011616922894
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: Interest deduction
Are you entitled to claim a deduction for interest incurred on an investment property during the period it was undergoing renovations and producing no rental income?
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You and your spouse purchased an investment property, consisting of two units, as joint tenants.
One of the units was rented from the time of purchase for a period of 18 months.
The other unit was not in a liveable state when purchased and has been gradually renovated.
When the tenant vacated the rented unit, it had deteriorated to a point where it also required major repairs.
The work on the units has taken longer than expected due to financial constraints and difficulty finding tradesmen to do the work.
You expect the units to be ready for tenants and back on market within 20 months.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature.
The principles in relation to the deductibility of expenses incurred in gaining or producing assessable income have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals.
It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. In Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steeles case), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. Taxation Ruling TR 2004/4, in considering the above decision, 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:
· 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. While this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future.
In your case, you and your spouse purchased two units to be used as rental properties. One of the units was tenanted from the time of purchase for 18 months before falling into disrepair. The time taken to carry out all the renovations and repairs required to both units will be approximately 20 months. When taking into account the amount of work required and the time it will take to complete the work, the nexus between the interest expenses incurred and the income producing activity has not been broken. Therefore, the interest expenses incurred on the investment property during the period the units are being renovated/repaired are an allowable deduction under section 8-1 of the ITAA 1997.