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Ruling

Subject: Rental expenses

Question 1

Are you entitled to a deduction for the legal expenses and stamp duty incurred when purchasing a property on a crown lease, with the intention of building a rental property?

Answer

Yes.

Question 2

Are you entitled to a deduction for the interest incurred on borrowed funds used to pay for the stamp duty and a booking deposit?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You have purchased a property on a crown lease.

The property is expected to be completed in 2012-13.

You intend to rent the property for residential purposes as soon as it is completed.

You have paid a booking deposit, stamp duty and incurred legal expenses to register the property.

You have taken out a bank loan for the property and drawn down on the loan to fund the deposit and stamp duty.

You have incurred an interest expense.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-20

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.

The deductibility of legal expenses and stamp duty

Section 25-20 of the ITAA 1997 states that you can deduct expenditure you incur for preparing, registering or stamping a lease of property, if you have used or will use the property solely for the purpose of producing assessable income.

A crown lease on the property satisfies a general law requirement of a lease, in that the lease is granted for a definite period. Therefore section 25-20 of the ITAA 1997 applies to allow costs incurred in the preparation, registration and stamping of a lease property that will be held by the taxpayer for the purpose of producing assessable income.

The legislation does not provide that the deduction be amortised over either a set period of time or for the duration of the lease. It is implicit, therefore, that the expense can be deducted in the year that it is incurred.

You incurred legal expenses to register your property and stamp duty expenses, and although the property did not earn assessable income during the financial year, at the time you incurred the expense you intended for the property to be used for income producing purposes.

As such you are entitled to a deduction for the legal fees and stamp duty incurred on purchasing the property.

The deductibility of interest

It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139, concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income where:

· 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.

In your case you purchased a property, with an intention to build an income producing property. There is no private or domestic purpose for holding the property. As construction is expected to be completed in 2012-13, the necessary connection between the interest expenses and rental income still exists.

As the expenses you incurred in relation to the property were incurred solely for income producing purposes, they are not considered to have been incurred at a point 'too soon' prior to the commencement of the income producing activity.

Therefore you are entitled to a deduction for the interest incurred on the borrowed funds in relation to your rental property.