Edited version of private ruling

Authorisation Number: 1011780966591

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Ruling

Subject: Rental property expense prior to income

Question:

Are you eligible for a deduction on interest on the loan and holding expenses for your rental property prior to assessable income being derived from it?

Answer:

Yes

This ruling applies for the following periods

Year ending 30 June 2009

Year ending 30 June 2010

Year ending 30 June 2011

The scheme commenced on

July 2007

Relevant facts

You purchased an existing house which you intended to use for investment purposes. You demolished the house and built a new house which became available for rent in the 2011 financial year.

You took out a loan during 2007 and had the house designed, a survey done, plans produced for the new property and had a public telephone moved from the area.

You worked on the project with the builder towards the end of 2007.

When the design was completed, you applied for, and were granted development approval. You received demolition approval, proceeded, and then constructed the new property which was placed on the rental market during 2011. From when the first set of drawings was produced until the detailed design was completed was a period of X months.

In order to locate the driveway of the new property, the public telephone had to be relocated. The drawings for the new property needed to be provided to Telstra, who spoke to the council, conducted public consultation and invoiced you. This process took approximately X months to be completed.

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.

Taxation Ruling TR 2004/4 considers deductions for interest incurred prior to the commencement of income earning activities and the implications of the decision of the High Court in Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) .

In Steeles Case, the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. 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

· continuing efforts are undertaken in pursuit of that end.

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.

In your circumstances the interest and rates expenses are not considered to be incurred as a prelude to income earning activities and it is not considered that the expenses are private or domestic as you purchased the property as an investment property.

As you purchased the property as an investment property it is accepted that the expenses were incurred with a view to gaining or producing assessable income and the length of time between purchase of the 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.

The Commissioner also accepts that you made sufficient ongoing efforts towards the production of assessable income for the period from when you purchased the property until the new property was available for rent.

Accordingly you are entitled to claim a deduction for your share of the interest and holding expenses relating to your ownership of the rental property in these income years.