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Edited version of your private ruling
Authorisation Number: 1012531960426
Ruling
Subject: Rental - deductions (repairs, capital works, interest, borrowing expenses)
Question
Are you entitled to claim a deduction for the costs of interest, body corporate, rates, electricity and water incurred on a property which has not earned any rental income?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts and circumstances
You purchased a property on the Month 20XX with the intention of making it a holiday rental.
You purchased the property when the resort was closed.
The resort now has new owners and management team and is officially opening in either Month 20XX.
The new owners have requested that all individual owners do an upgrade on their property which will cost in excess of $X.
You have decided not to do the upgrade but instead to sell the property.
The property was listed on the market on the Month 20XX.
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) 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.
It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. In Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. Taxation Ruling TR 2004/4, in considering the above decision, 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 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, and
· continuing efforts are undertaken in pursuit of that end.
In your case, while your intention may have been to make the property a holiday rental home, there is no evidence that the interest in the property incurred with the one end view of producing assessable income. You purchased the property with the hope that you might achieve long term capital growth and produce some income along the way. The property has not earned any income since you acquired it nor have you made continuing efforts in order to achieve this outcome. Therefore, the costs that you have incurred are not deductible under section 8-1 of the ITAA 1997.