Edited version of private ruling

Authorisation Number: 1011636503735

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Ruling

Subject: Investment interest expenses

Are you entitled to claim a deduction for interest on a loan used to purchase a rental property, before building has commenced?

Yes.

Relevant facts

In 2009, you invested borrowed funds to purchase an investment property before it was built.

The property is one of a unit development and availability of funding has been affected by the Global Financial Crisis.

Construction will not commence until late 2010. The land is settled and now owned by the development company. The equity in the land can be used to secure further funding for construction.

Final financing approval is sought by the developers to commence construction.

The developers anticipate completion of the project within 15 months of the commencement of construction.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 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.

 Interest on funds used to purchase a property on which the taxpayer intends to build an income producing asset may be deductible, from the time of the acquisition of the property (Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139) (Steeles Case). It follows from Steeles Case 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.

You have incurred interest on a loan used to purchase an investment property.

Since your initial deposit, the land to be used to build the investment property has been purchased by the developer, and the equity can be used to secure further funding for construction.

The main reason for the delay in commencement of construction was the shortage of funding from lenders due to the Global Financial Crisis.

Now that the land is fully owned by the developer, it is anticipated that construction funding will be secured soon, and project completion is forecast to be by the end of 2011.

The period of time between your purchase of the investment property and the settlement period is not considered to be so long that the necessary connection between the interest outgoing and the derivation of income is lost.

It is accepted that you made continuing efforts in pursuit of the construction to be used solely for income producing purposes, as evidenced by the correspondence from the development company to you.

Accordingly, you are entitled to a deduction for your share of interest expense relating to this property.

As stated in Steeles Case, the interest on funds used to purchase a property on which the taxpayer intends to build an income producing asset may be deductible, from the time of the acquisition of the property.