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Ruling
Subject: Rental property interest
Question
Are you entitled to a deduction for interest incurred on a loan used to purchase an investment property off the plan?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You purchased an off the plan investment property.
The expected settlement date was October 20XX. However, the settlement date was November 20XX.
You have borrowed the deposit money from a bank.
It is your intention to have the property available for rent once it is completed however you have no control over the actual completion date.
The sunset clause in the contract was in force from the contract signature.
You have incurred interest expenses on the borrowed funds.
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.
In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. It follows from Steele's Case 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 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.
You have incurred interest on a loan used to purchase an investment property off the plan. The settlement date was in November 20XX. The period of time between the purchase of the investment property and the settlement period is not considered to be so long that the necessary connection between the interest outgoing and the derivation of income is lost.
As your property will become income producing, you are entitled to claim a deduction for interest expenses incurred on the loan.