Edited version of private ruling

Authorisation Number: 1011734473574

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Ruling

Subject: Investment property expenses

Question:

Are you entitled to claim a deduction for interest expenses incurred to purchase vacant land prior to earning assessable income?

Answer: Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

You purchased a block of land in the income year ended 30 June 2009.

You borrowed money to purchase the land.

You intended to build an investment property on the land to produce assessable income.

Development of the land has not yet commenced due to difficulties obtaining finance.

You have building plans that are currently being finalised with the architect and will then be submitted for council approval.

You have sold a property to help finance construction of the investment property.

You intend to begin building in the income year ended 30 June 2011.

You intend to begin producing assessable income in the income year ended 30 June 2012.

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, or relate to the earning of exempt income.

It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) 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.

In your case, you incurred expenses to purchase property to be used solely for income producing purposes. The expenses were incurred in periods prior to deriving assessable income and therefore the above conditions need to be satisfied.

Paragraph 35 of TR 2004/4 states that interest on borrowed funds which have been expended upon any aspect of the development of a property which is solely intended to be employed in income earning operations would satisfy the first of the conditions above. The expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity.

There is no private or domestic purpose for holding the property as you have always intended to build an income producing property.

The length of time between the purchase of property and commencement of construction is not considered to be so long that the necessary connection between the outgoings and the assessable income is lost. Paragraph 36 of TR 2004/4 states that 'continuing efforts' does not require constant on-site development activity and the test should be set against normal time frames of the relevant industry. You have had some unforeseen delays in beginning construction but intend to commence building within two years of the purchase of the land. This is not an unreasonable period of time in the building industry.

You purchased the land and incurred the interest expense with one view in mind, the gaining of assessable income.

Continuing efforts are being undertaken to pursue the production of assessable income. The steps to obtain finance and develop building plans indicate you still intend to build your investment property.

Therefore, in your case, all the conditions set out in TR 2004/4 have been met.

In conclusion, you are entitled to a deduction for interest expenses under section 8-1 of the ITAA 1997.