Edited version of private ruling

Authorisation Number: 1011672041303

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Ruling

Subject: Rental Deductions - Interest

Can you claim interest expenses accrued in respect of your residence for the period covering when you first took out the residential investment loan, until the property is rented or available for rent?

No

This ruling applies for the following period:

1 July 2009 - 30 June 2010

Relevant facts and circumstances

You and your spouse jointly owned a property (the unit).

You purchased your spouse's share in the unit and became the sole owner.

To finance the purchase, you took out a residential investment loan from a financial institution.

You are currently building a new house, which will become your primary place of residence once completed.

When your new residence is completed, you will rent out the unit.

While you are building your new residence, you will reside at the unit, and this property will not be available for rent until you move into your new residence.

This date is expected to be by the end of the 2009-10 income year.

You obtained a market value rental figure for the unit from a real estate agent in 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose. The interest is not deductible if the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income.

The ATO view regarding the deductibility of interest expenses is highlighted in Taxation Ruling 2004/4 (TR 2004/4).

TR 2004/4, which deals with the implications of Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case), states in paragraph 9 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, you took out a residential investment loan with the express reason of purchasing your spouse's share of the unit. Your intention is to use the unit as an investment property. You are currently in the process of building a new residence that will become your main residence once completed. This is expected to be by the end of the 2009-2010 income year. Whilst your new residence is being constructed you will reside in the unit, and this will not be available for rent until you move into your new residence.

In these circumstances, the interest expense on funds borrowed for the purpose of purchasing your spouse's share of the unit, with the aim of using it as an investment property:

· is not considered to be incurred at a point 'too soon'

· is not preliminary to the commencement of the income earning activity

· 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, and

· the interest is incurred with one end in view, the gaining or producing of assessable income.

However, continuing efforts were not undertaken in pursuit of the renting out of the property. An existing property will be considered to be held for income-producing purposes if the property is being rented out or available for rent. Where a property is not yet actually being rented it will be considered to be 'held' for the purpose of producing assessable income where the property is genuinely available for rent as evidenced by the taxpayer undertaking active and bona fide efforts to let the property at a commercial rental. This would include such activities as listing the property with a real estate agent, and placing advertisements in newspapers (Case V133 88 ATC 847 (Case V133)). In your case, the unit is not being rented and is not listed as available or considered to be 'held' for the purpose of producing assessable income because you will be using the residence for a private purpose.

Whilst you satisfy three of the conditions in the Steele's Case, it is considered that the interest expense is of a private or domestic nature and that continuing efforts were not undertaken in pursuit of the renting out of the property.

Accordingly, for the above reasons, a deduction for interest expenses accrued in respect of your residence for the period covering when you first took out the residential investment loan, until the property is rented or available for rent is not available under s 8-1 of the ITAA 1997.

Additional information 

It should be noted that as you are the sole owner of the property, any interest expense incurred by you, from the time the property is rented or becomes available to rent will be deductible.