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Edited version of your private ruling
Authorisation Number: 1012496006992
Ruling
Subject: Deductibility of interest expense
Question
Are you entitled to a deduction for all interest incurred on a loan, from the date the deposit was drawn down to purchase a rental property unit off the plan?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You established an interest only investment loan.
You service the loan repayments on your own.
You drew down a deposit to acquire a unit off the plan from a developer.
You will use the unit for income producing purposes.
The legal title of the property is in your name only.
The developer advised that the building will be completed some time in late 20XX.
The balance of the purchase price will fall due on settlement.
You incurred interest from the date the borrowings were drawn down to fund the deposit.
You have not used the loan for private purposes.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature.
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 unit off the plan from a developer, with the intention of using the property for income producing purposes once completed.
As the interest expense already incurred was 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.
In your situation, it is accepted that the interest incurred is referable to the purchase of the rental property, and is therefore incurred in the production of your assessable income. Accordingly you are entitled to a deduction for all interest incurred on the loan, from the date the deposit was drawn down.