Edited version of your private ruling

Authorisation Number: 1012461517555

Ruling

Subject: Rental expenses prior to income producing activity

Question

Are you entitled to a deduction for the loan interest, general rates and water rates you incurred relating to your share of the property purchased?

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 are the joint owner of residential land you purchased in order to demolish the existing residence, and build new residences for rent.

You borrowed to be able to purchase the property and develop the new dwellings.

Immediately following settlement of the property you obtained a quote for demolition of a dwelling on the land.

You lodged a development application soon afterward. Development followed in sequence over the next several months, including demolition of the existing building, subdivision, new building construction and tenanting of the new dwellings.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature.

Taxation Ruling TR 2004/4 considers deductions for interest incurred prior to the commencement of income earning activities and the implications of the decision of the High Court in Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) .

In Steeles Case, the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. Interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances: 

· 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

· continuing efforts are undertaken in pursuit of that end.

While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including local council, water and sewage rates, land taxes and emergency services levies.

In your circumstances the interest and rates expenses are not considered to be incurred as a prelude to income earning activities and it is not considered that the expenses are private or domestic as you purchased the property as an investment property.

As you purchased the property as an investment property it is accepted that the expenses were incurred with a view to gaining or producing assessable income and the length of time between purchase of the property and income from rent is not considered to be so long that the necessary connection between the outgoings and the assessable income is lost.

The Commissioner also accepts that you made sufficient ongoing efforts towards the production of assessable income for the period from when you purchased the property until the new dwellings were available for rent.

Accordingly you are entitled to claim a deduction for your share of the interest and holding expenses relating to your ownership of the rental property in this income year.