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Edited version of your private ruling
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Ruling
Subject: Deductions - interest
Questions
Are you entitled to a deduction for the full amount of interest and other expenses in respect of your property?
Answer: No
Are you entitled to a deduction for the amount of interest and other expenses you incur in respect of your property, to the extent of the income received from the property?
Answer: Yes
Will the interest and other expenses you incur in respect of your property, surplus to the income received from the property, be included in the cost base of the property?
Answer: Yes
This ruling applies for the following periods:
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You purchased a vacant block of land. The block is a bush block. The block has not been separated into paddocks and does not have water or electricity connected.
The property has been leased for agistment for several years.
The lessee is an unrelated third party.
You took out a loan to buy the property initially. The loan has never been refinanced.
The land is currently on the market for sale.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Deductibility
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.
Agistment income is assessable income according to ordinary concepts. However, it is not business income or primary production income where the property or a substantial part of the property is used solely for agistment (Income Tax Ruling IT 225). Where a property is used solely for agistment, income will rarely equate to the running costs of the property, therefore the arrangement lacks a commercial character.
AAT Case 38/97 97 ATC 397; (1997) 36 ATR 1154 specifically dealt with the treatment of interest expenses incurred in relation to agistment income. In this case it was held that the taxpayers, a husband and wife who agisted cattle on their property, were not engaged in the business of agistment and that they had two purposes in holding the property: the generation of income and its value as an asset. Gaining or producing income was subordinate to the holding of the property as part of their asset base. It was held that the interest on the loan to purchase the property was more properly characterised as an outgoing to maintain the asset base than to produce assessable income so was not deductible. However, the Tribunal was unable to apportion the losses and outgoings to either the maintenance of an asset base or the production of income. As a result the Commissioner was correct in allowing a deduction to the extent of the income received from agistment as the conclusion did not mean that no part of the losses and outgoings was deductible.
Your situation is similar to the above case in that interest and other expenses are incurred to hold the property rather than to earn assessable income. You have owned the property for approximately 18 years and have agisted it for the past 8 years. Interest and other expenses were incurred for 10 years before the property started earning assessable income. The property has not been developed nor has any business been operated on it since you owned it. It is clear that the land is not being held for an income-producing purpose. You are therefore allowed a deduction for interest and other expenses to the extent of the income received from the agistment.
Cost Base
Subsection 110-25(4) of the ITAA 1997 provides that the third element of the cost base of an asset acquired after 20 August 1991 is the costs of owning the asset. The costs include, but are not limited to, costs of maintaining, repairing or insuring it, interest on money borrowed to acquire the asset or to refinance such a borrowing, interest on money borrowed to finance capital improvements to the asset, and if the asset is land, rates and land tax.
Accordingly it is accepted that the interest and running cost expenses you incur in respect of the property in excess of the income received will form part of the cost base of the property.