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Ruling
Subject: rental property expenses
Question 1
Can you claim interest on your rental property loan after the tenant moved out and before the property was sold?
Answer
Yes.
Question 2
Are you entitled to a deduction for an early loan repayment fee?
Answer
Yes.
Question 3
Can you include a settlement attendance fee in the calculation of any capital gain or loss from the sale of your investment property?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You put your rental property on the market while it was tenanted. You did not intend to ask the tenant to leave while the property was for sale.
The tenant vacated the property. For the period between when the property was vacated and when it was sold the property was still available for rent. You did not advertise for a new tenant as the lease would have been for a short period of time.
The property was vacant for a period of several months in the 2010-11 financial year.
You incurred interest expenses during the vacant period. You also incurred a fee for a deferred loan establishment fee and a fee for attending settlement when you paid out the investment loan.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Subsection 110-25(3).
Income Tax Assessment Act 1997 Section 110-35.
Income Tax Assessment Act 1997 Subsection 110-35(2).
Reasons for decision
Section 8-1 Income Tax Assessment 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.
Loan interest
From the time your tenant vacated the property until it was sold, the property remained available for rent.
Taxation Ruling TR 95/25 considers the deductibility of interest. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. The interest will be deductible to the extent that the property is used to produce assessable income.
Your property remained available for rent after the tenant had vacated, and until the time of sale.
Therefore, you are entitled to a deduction for the interest on your rental property loan for the period from when the tenant vacated until the sale date.
Deferred establishment fee
Taxation Ruling TR 93/7 examines the deductibility of penalty interest payments. Penalty interest payment refers to an amount payable by a borrower under a loan agreement in consideration for the lender agreeing to accept an early repayment of a loan.
Where a borrowing is used to acquire an income producing asset, and a penalty interest payment is made to rid you of a recurring obligation to pay interest on the loan, the penalty interest payment is deductible under section 8-1 of the ITAA 1997.
In your case, you repaid a loan which you used to fund an income producing property prior to the expiry of an agreed fixed period with the lender. You incurred an early repayment deferred establishment fee by cancelling the fixed period early.
As you incurred this penalty to cancel the fixed loan period early to enable you to pay less interest, you are entitled to a deduction for the penalty under section 8-1 of the ITAA 1997.
Capital gains provisions
For most capital gains tax (CGT) events, you need the cost base of the CGT asset to work out whether or not you have made a capital gain. If you may have made a capital loss, you need the reduced cost base of the CGT asset for your calculation.
The cost base of a CGT asset is made up of five elements. The second element of the cost base of a CGT asset is the incidental costs incurred in acquiring the asset or which relate to a CGT event that happens in relation to the asset (subsection110-25(3) of the ITAA 1997).
Incidental costs that can be included in the cost base of a CGT asset are set out in section 110-35 of the ITAA 1997. It is considered that expenditure incurred for the services of a settlement agent constitutes remuneration for the services of a consultant for the purposes of subsection 110-35(2) of the ITAA 1997.
The portion of the settlement agent's fees that are directly related to the sale of the property will form part of the second element of the cost base (or reduced cost base) of the rental property.