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Ruling
Subject: Rental interest deductions
Question
Are you entitled to a deduction for interest expenses while you demolished the existing rental property and constructed two new rental units?
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 owned a rental property.
In 2010 you demolished the property.
New units were constructed on the site and completed in 2011.
The units were rented from 2011.
You incurred interest expenses in relation to the property during the period of demolition and reconstruction.
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. There is no private or domestic purpose for holding the property, your intention was to demolish the existing rental property to construct new rental units. The period of time from demolishing the existing property to having the new units available for rent was reasonable in the circumstances.
It is accepted the interest has been incurred in producing assessable income. Accordingly, the interest expenses incurred during the period of demolition and construction of the new units are deductible under section 8-1 of the ITAA 1997.