Edited version of private ruling

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Ruling

Subject: Interest and holding costs

Question:

Are you entitled to a deduction for the interest and holding costs for your rental properties that were incurred during the period they were being renovated?

Answer: Yes.

Relevant facts

You are the owner of two rental properties.

Property A was tenanted at the time you signed the contract to purchase. The tenant left the property during the settlement period, and you commenced renovation immediately upon settlement. The renovation process took several months, and there have been tenants since then, with the most recent one expected to vacate soon. The property will again be available for rent.

Property B was purchased while tenanted. The tenant left at the end of their lease. You then commenced renovation which took several months. The property is now available for rent and listed with a real estate agent.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 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.

Application to your circumstances

You purchased both properties as rental properties with the intent to keep them as rental properties.

You renovated each property as soon as the opportunity arose, and both have been made available for rent immediately on completion of the renovations.

From the time you purchased each of the properties, your intention was to produce income by renting them, and there was no private or domestic purpose for holding the properties.

Where a borrowing is used to acquire an income producing asset, the interest on this borrowing is considered to be incurred in the course of producing assessable income. With regards to borrowings relating to property, the interest will be deductible to the extent that the property is used to produce assessable income.

Taxation Ruling TR 2004/4 examines, amongst others, the deductibility of interest prior to the commencement of your income earning activity.

 Interest will be incurred in gaining or producing 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 have one rental property from which you have previously earned rental income, and another which was income producing when you signed the contract to purchase. You incurred the interest with the purpose of holding your properties as income producing assets. As such, this is not incurred too soon and is not a preliminary expense. The interest relates to income producing assets and is not considered private or domestic.

It is not considered that the connection between the interest expense and the income earning is lost.

Consequently, you are entitled to a deduction for interest you incurred while the properties were vacant during renovation. The principles set out in TR 2004/4 also apply to other types of expenditure such as local council, water and sewage rates. It then follows in your case that other necessary recurring expenditure of water and council rates and body corporate fees are also deductible.

Please note that while the periodic body corporate fees are eligible for deduction, any special levies, such as those for capital improvement are regarded as capital, and as such are not part of the eligible holding costs for immediate deduction.