| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011875005465
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: Deductibility of interest expenses
Question
Can you claim a deduction for the interest expenses incurred on borrowings you took out to fund the construction of a dwelling that you intended to rent out but instead sold on completion?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You purchased a rental property a some years ago and have rented it to tenants since then.
To expand your portfolio, you used the back yard to build a second dwelling so that you could rent that too. However, the planning process took well over X years (through no fault of yours), severely delaying construction. By law, planning applications should be decided within 60 days. Your building cost estimate was much lower than the final costs. The project took over X years to complete and this has significantly reduced your expected income.
You borrowed funds in the 2010-11 financial year to construct the second dwelling.
Given the loss of anticipated income and the blow out of building costs you were forced to sell the property immediately after completion. The sale is being treated under the capital gains tax legislation for income tax purposes.
After assessing the expected rental income from the second dwelling you found that it was definitely not feasible for you to keep it as an investment. You have sold the second dwelling (pending on approval of subdivision) but are continuing to rent out the original property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Rental property interest deduction
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.
In Steele v. FC of T (1999) 197 CLR 459, 99 ATC 4242, (1999) 41 ATR 139, the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. Taxation Ruling TR 2004/4, in considering the above decision, 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 circumstances where the following factors are met:
· 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 and your spouse acquired the property to rent out the property that was currently there. You intended to increase your rental portfolio by build another dwelling on the property to rent out.
The interest expenses were incurred on funds borrowed to construct the second dwelling. The delay in the construction of the property arose through no fault of your own but is rather due to the delays in the planning process of getting approval which took a period of X years. Due to the increasing costs caused by the delays you had to sell the dwelling rather than rent it out. You meet the criteria set out in TR 2004/4, therefore you are entitled to claim the interest deduction in relation to the construction of the dwelling that was to be rented out.
You can claim a deduction for your share of the interest expenses.