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Edited version of private ruling
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Ruling
Subject: interest deductions
Can you claim a deduction for interest expenses incurred on a loan used to purchase land on which you intend to build a rental property when your financial position is more secure?
No.
This ruling applies for the following period
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commenced on
1 July 2007
Relevant facts
You and your spouse purchased a block of land for the sole purpose of building a rental property.
Eighty percent of the purchase price was financed using a bank loan and the other 20% using funds redrawn from your private residence home loan.
The bank loan is an interest only loan, although, you have made additional payments on this loan.
You intend to build a rental property on the land once you are confident that your financial circumstances are secure enough to do this.
You believe that the property will be built within six years of the land purchase.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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, 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 incurred interest expenses in relation to the land purchase between the 2007-08 and 2009-10 income years. Your intention has always been to build a rental property on the land once your financial position is secure. Since purchasing the land there have been no efforts made to build a rental property and you do not expect to be in a position to build the property for several years. Your plans to build a rental property on the land are dormant and your holding of the asset in the years in question is passive, even though your intention is to revive the venture at some time in the future. The reason for the delay is your financial position and not any factors intrinsic to the property development itself.
Therefore, the interest expenses you have incurred between the 2007-08 and 2009-10 income years in relation to the purchase of this land are not deductible as the necessary connection between outgoings and assessable income is too remote.