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Ruling

Subject: Interest and building inspection

Question 1:

Can you claim a deduction for interest?

Answer:

No.

Question 2:

Can you claim a deduction for the cost of a pest and structural inspection?

Answer:

No.

This ruling applies for the following periods

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

A relative placed a deposit on your behalf on an investment property. The receipts for the deposits were made out to your relative's name. Your relative signed the contract in their name, on your behalf as a nominee. The funds were from another relative in an informal loan to you. This person had to redraw on their mortgage to be able to advance you the funds. You had no formal agreement to repay the loan.

Before settlement could take place the vendor declared bankruptcy and could not present the title. You were unable to have the deposit refunded for several months. You have calculated an amount of interest using the bank's rates over this period of time. You have used as a basis for the calculation the rate of interest that the lender paid on the redrawn mortgage.

You also had a pest and structural inspection carried out.

Reasons for decision

Interest on deposit money

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.

In your case, your deposit money was held by the vendor, and so any interest which may have been gained by investing the funds has been foregone. The interest foregone is an opportunity cost; however it is not an actual loss or outgoing incurred by you. Also, you have not been charged interest by your relative on the funds that they made available to you. You have not incurred any expense as you did not pay any interest on the money.

Therefore, there is no loss or outgoing incurred by you in gaining or producing assessable income, and no deduction is allowed.

Regarding your reference to Taxation Ruling TR 2004/4, this deals with deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities. As you did not actually incur any interest expense, TR 2004/4 is not applicable in your case.

Pest and structural inspection

The costs associated with the purchase of a rental property are generally not deductible as they form part of establishing the profit making asset, that is, they are capital costs. On the other hand, costs incurred in deriving rental income (for example, agent commissions to collect rents) are deductible revenue outgoings because they are incurred in deriving income from that asset.

The cost incurred by you for a pest and structural inspection conducted as part of purchasing the property is a capital expense and is therefore not an allowable deduction under section 8-1 of the ITAA 1997.

This particular expense was also incurred at a point too soon, that is, before any assessable income was produced, or before the income producing asset was available for rent.