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Ruling

Subject: Rental property deductions - interest during repairs

Question

Are you entitled to a deduction for interest for the period your property was under repair?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You own a rental property.

While tenanted, the kitchen, ceilings and roof tiles of the property were damaged in a fire.

It was your intention to have the damage repaired as soon as possible, so that the property could continue to derive rental income.

There was a delay of over seven months before the repair work commenced.

You did not receive any rental income during this time.

The delay was caused for a number of reasons:

The area in which the property is located was subject to a natural disaster (excessive rain and flooding) during the time, causing a lack of available tradespersons in the area.

More damage to the property was revealed subsequent to the initial insurance assessment, so your insurance company had to send another assessor to reassess the damage for insurance.

Delays in supply of materials and difficulty in matching existing materials.

Accessibility to the property was poor due to the flooding in the area, making it difficult for building materials to be transported to the property.

The tradesperson/builder that was carrying out the repairs on your property had numerous other larger jobs also to be completed. You believe the repairs to your property were not a priority for them.

Upon completion of the repairs your property was again available for rent through a real estate agent.

You incurred interest expenses on the loan for the property during the period of repairs.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

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, or relate to the earning of exempt income.

Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put.

Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income: Taxation Ruling TR 95/25

In your case, the interest is incurred with regard to property that was used solely for income producing purposes before the repairs started. There is no private or domestic purpose for holding the property, your intention was to repair the property then return it to the rental market. There was a delay in the commencement of the repairs; however it is considered that you made continuing efforts to have the repairs completed. Indeed the property was again listed for rental upon completion of the repairs.

It is accepted the interest has been incurred in producing assessable income. Accordingly, the interest expenses incurred during the period of repairs are deductible under section 8-1 of the ITAA 1997.