Edited version of private ruling

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Ruling

Subject: Rental property expenses

Question

Are you entitled to a deduction for borrowing expenses, rates and land taxes, electricity, gas and insurance expenses incurred during the construction phase of a rental property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

You purchased a block of land to be used for income producing purposes.

You built a rental property on the land.

You incurred the following expenses during the construction phase:

· Borrowing expenses

· Rates and land taxes

· Electricity

· Gas

· Insurance

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

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.

The Commissioner's view in regards to deductions for interest incurred prior to the commencement of relevant income earning activities is set out in Taxation Ruling TR 2004/4.

Paragraph 9 of TR 2004/4 states:

It follows from Steele [Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139] 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 ATO Interpretative Decision ATO ID 2001/479, the taxpayer purchased land and intended to complete the building of a house on the land within 12 to 18 months of purchase, and to then use the property to produce rental income. The taxpayer incurred local council, water and sewage rates, land taxes and emergency services levies with regard to the property prior to the completion of the building of the house.

In ATO ID 2001/479 it was the Commissioner's view that the taxpayer was entitled to a deduction for these expenses under section 8-1 of the ITAA 1997, as while Steele's case deals with the issue of interest, the principles can be applied to other types of expenditure including local council, water and sewage rates, land taxes and emergency services levies. The expenses were incurred with regard to property to be used solely for income producing purposes. The expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity.

Likewise, in ATO Interpretative Decision ATO ID 2001/478, it was the Commissioner's view that a taxpayer who incurred borrowing expenses when he purchased land and intended to complete the building of a house on the land within 12 to 18 months of purchase, and to then use the property to produce rental income was, in applying the principles from Steele's case, entitled to a deduction for these expenses under section 25-25 of the ITAA 1997.

The facts in your case are very similar to those in ATO ID 2001/479 and ATO ID 2001/478. In your case you purchased a block of land in order to construct a house on it to use for income producing purposes. You incurred expenses during the construction phase.

Therefore, you are entitled to a deduction for rates and land taxes, electricity, gas and insurance under section 8-1 of the ITAA 1997, and you are entitled to a deduction for borrowing expenses under section 25-25 of the ITAA 1997.