Edited version of private ruling

Authorisation Number: 1011697268842

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Ruling

Subject: Rental property expenses and capital gains tax

Question 1

Are the holding costs relating to the vacant blocks of land that were incurred prior to the properties being available for rent deductible, when it was your intention to use the land to produce rental income?

Answer

Yes.

Question 2

Are the holding costs relating to the vacant blocks of land deductible when it was your intention to sell the land and not use it to produce rental income?

Answer

No.

Question 3

Are the holding costs relating to the vacant blocks of land that were incurred prior to the properties being available for rent included in the cost base for capital gains tax (CGT) purposes, when it was your intention to use the land to produce rental income?

Answer

No.

Question 4

Are the holding costs relating to the vacant blocks of land included in the cost base for CGT purposes when it was your intention to sell the land and not use it to produce rental income?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

15 October 2009

Relevant facts and circumstances

You purchased a few vacant blocks of land.

Your intention was to build a house on each block and rent out each house.

You have incurred expenses since purchasing the land.

You engaged a builder to construct a house on each block.

The plans for each house are currently pending approval of your local council.

You have now decided that you are not financially capable of owning all of these properties and you are looking to sell one or more of them.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Subsection 110-45(1B).

Reasons for decision

Deductibility of holding expenses

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.

It is the Commissioner's view that holding expenses that are incurred in relation to a property held for future income producing purposes are deductible under section 8-1 of the ITAA 1997 in the following circumstances:

· the expense is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities

· the expense is not private or domestic

· the period of 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 expense is incurred with one end in view, the gaining or producing of assessable income, and

· continuing efforts are undertaken in pursuit of that end.

(Taxation Ruling TR 2004/4)

In ATO Interpretative Decision ATO ID 2001/479, the taxpayer purchased land with the intention of building a house on it within 12 to 18 months of purchasing the land. He intended to use the property to produce rental income. Prior to the property being used to produce rental income, the taxpayer incurred various expenses such as rates and land tax.

In this case it was the Commissioner's view that the expense was not incurred 'too soon', as the length of time between purchase of the property and commencement of construction was not considered to be so long that the necessary connection between the outgoings and the assessable income is lost.

Your situation is similar to the facts in ATO ID 2001/479. In your case you purchased blocks of land, you have engaged a builder to construct a house on each block and the plans for this construction are currently pending council approval. You purchased the blocks of land with the intention of using them to produce rental income.

The facts of your case show that you have made continuing efforts to build a house on each block and then rent them out to produce assessable income. You have undertaken steps to achieve this even prior to the settlement date. The expenses are not private or domestic in nature.

Therefore, you are entitled to a deduction under section 8-1 of the ITAA 1997 for holding expenses incurred prior to the land being used to produce assessable income when it was your intention to use the land to produce assessable income.

However, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for holding expenses incurred after your intention changed and you decided to sell the land and not use it to produce assessable income.

Capital gains tax (CGT)

The cost base of an asset is generally what the asset costs you. The cost base is made up of five elements:

1. money paid for the asset

2. incidental costs of acquiring or selling it (e.g. stamp duty, conveyancing, real estate agent fees)

3. cost of owning it (e.g. repairs)

4. cost associated with increasing or preserving its value

5. cost to preserve or defend a taxpayer's title or right to it

(section 110-25 of the ITAA 1997).

Although holding costs such as rates may fall within the second or third element of the cost base, subsection 110-45(1B) of the ITAA 1997 specifically excludes expenditure from the cost base to the extent that you have deducted it or can deduct it.

As discussed above, you are entitled to a deduction under section 8-1 of the ITAA 1997 for holding expenses incurred prior to the land being used to produce assessable income when it was your intention to use the land to produce assessable income.

Therefore, these expenses cannot be included in the cost base for CGT purposes.

However, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for holding expenses incurred after your intention changed and you decided to sell the land and not use it to produce assessable income.

Therefore, these expenses can be included in the cost base for CGT purposes, as they are expenses relating to the cost of owning the properties.