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Ruling

Subject: Interest and stamp duty

Question 1

Are you entitled to a deduction for your share of the stamp duty incurred when purchasing vacant land located in the Australian Capital Territory (ACT), with the intention of building a rental property?

Answer

Yes.

Question 2

Are you entitled to a deduction for your share of the interest incurred on borrowed funds used to pay for stamp duty and to purchase a vacant block of land, while your intention was to build a rental property?

Answer

Yes.

Question 3

Are you entitled to a deduction for your share of the interest incurred on borrowed funds used to pay for stamp duty and to purchase a vacant block of land, after you changed your intention to use the property for private use only?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and your spouse purchased land in the ACT with the intention of constructing a dwelling and renting it out.

Construction of the dwelling was expected to be completed approximately 12 months after settlement on the land took place.

Due to changes in your personal circumstances, part way through the construction period your intention changed to that of using the property for private purposes.

You have provided evidence to show that your intention at the time of purchase of the land and during part of the construction period was to use the property to earn rental income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Section 25-20.

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.

The deductibility of stamp duty

Section 25-20 of the ITAA 1997 states that you can deduct expenditure you incur for preparing, registering or stamping a lease of property, if you have used or will use the property solely for the purpose of producing assessable income.

A crown lease on property in the ACT satisfies a general law requirement of a lease, in that leases in the ACT are granted for a definite period. Therefore section 25-20 of the ITAA 1997 applies to allow costs incurred in the preparation, registration and stamping of a lease property in the ACT that will be held by the taxpayer for the purpose of producing assessable income.

The legislation does not provide that the deduction be amortised over either a set period of time or for the duration of the lease. It is implicit, therefore, that the expense can be deducted in the year that it is incurred.

You incurred stamp duty during the 2009-10 financial year, and although the property did not earn assessable income during the financial year, at the time you incurred the expense you intended for the property to be used for income producing purposes.

As such the stamp duty incurred on purchasing the property is a deductible expense, and as the property is jointly owned, you are entitled to a deduction of half of the stamp duty paid.

The deductibility of interest

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 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, 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 where:

o the interest is not incurred too soon, is not preliminary to the income earning activities and is not a prelude to those activities;

o the interest is not private or domestic;

o 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;

o the interest is incurred with one end in view, the gaining or producing of assessable income; and

o continuing efforts are undertaken in pursuit of that end.

In your case you have incurred interest on an investment loan which was used to purchase a block of land and pay for stamp duty, for the purpose of constructing an investment property.

The anticipated completion date of the dwelling was 12 months after settlement on the land took place, at which time you intended to rent the property at a commercial rate.

The period of time between the purchase of the block and the anticipated availability of the property for rent is not considered to be so long that the necessary connection between the interest outgoing and the derivation of income is lost.

However, part way through the construction period, your intentions towards the property changed, and you now wish to use the property for private purposes only.

The Guide to rental properties 2011 states:

You can claim expenditure such as interest on loans, local council, water and sewage rates, land taxes and emergency services levy on land on which you have purchased to build a rental property or incurred during renovations to a property you intend to rent out. However, you cannot claim deductions from the time your intention changes, for example if you decide to use the property for private purposes.

Although your intention for the use of the property has now changed, at the time of purchasing the land and during part of the construction of the dwelling there was no private or domestic purpose for holding the property, as it was to be used for income producing purposes.

Accordingly, under section 8-1 of the ITAA 1997 you are entitled to claim a deduction for your share of the interest expenses incurred until the time your intention changed.