Edited version of private ruling

Authorisation Number: 1011636852799

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Ruling

Subject: interest deductions

Questions:

1. Can you claim a deduction for interest expenses incurred on a loan used to construct X units during the period you intended to on-sell them for a profit?

Answer:

No.

2. Can you claim a deduction for interest expenses incurred on a loan used to construct X units from the time your intention changed and they were made available for rent?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts

You built X units with an intention to on-sell all the units on completion.

The construction was partly financed with two bank loans.

The units were first listed for sale just prior to construction being completed.

Due to a downturn in the housing market, you were unable to sell the units at the required price.

After a number of on the market, the properties were made available for rent.

One was rented within a few weeks and another was rented within a few months.

Reasons for decision

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.

In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. It follows from Steele's 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.

In your case, the original intention was to build the units and then sell them. The interest was initially incurred in producing a capital asset and not with a view of gaining or producing assessable income within the meaning of section 8-1 of the ITAA 1997. However, when you where unable to sell the units for the price required, your intention changed and you made the units available for rent.

Applying the principles set out in Steele's Case it is clear that the interest expenses became that of an income producing activity at the time that you made the units available for rent. Therefore, you are entitled to a deduction for interest expenses on all the units from the time the units were available for rent.