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Edited version of your private ruling
Authorisation Number: 1012579691751
Ruling
Subject: Property expenses and depreciation
Questions
1. Are you entitled to claim a deduction for your share of ongoing costs such as land rates, taxes and management fees, and insurance premiums for building and landlord protection associated with the property incurred from when the contract is signed until settlement takes place?
Answer:
No.
2. Are you entitled to claim a deduction for your share of depreciation and capital works in relation to the property from when the contract is signed until settlement takes place?
Answer:
No.
This ruling applies for the following periods
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commenced on
1 July 2013
Relevant facts
You own a share in a property which has been tenanted.
During the 2013-14 financial year, you and the co-owner signed a Rent to Buy contract with the tenant.
From that date, all monies paid previously as rent will now be held in a trust account by your solicitor.
These monies cannot be accessed by you, the purchaser, or the other co-owner, and at the end of the nominated term of contract, all monies paid from contract date will be used as a deposit for the purchase of the property.
Your understanding is that from the date of signing the contract, that it is unconditional, and if either you as the vendor or the purchaser defaults on the conditions of contract, then the other party receives all monies paid to that date.
Until settlement you are still the legal part owner of the property, and are responsible for payment of land rates and taxes, agent management fees, and building and landlord insurance premiums.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 43-10
Income Tax Assessment Act 1997 Section 43-25
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.
Taxation Ruling TR 2004/4 considers the deductibility of interest expenses incurred prior to the commencement of, or following the cessation of, an income earning activity.
The ruling provides the following guidelines on when a deduction is allowable:
· 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.
While TR 2004/4 specifically deals with the deductibility of interest, the principles can be applied equally to other expenses.
In your case, the property was not used for an income producing purpose from the date that you signed the contract. From this date, the expenses do not relate to an income producing asset.
Consequently, you are not entitled to a deduction for land rates and taxes, management fees and insurance premiums you incurred on your property from when you signed the agreement for sale of the property. However, the expenses may be included in the cost base of the property for capital gains tax purposes.
Capital works deduction
Division 43 of the ITAA 1997 allows a deduction for capital expenditure incurred in constructing capital works, depending on the year of construction, where a residential property is used for income producing purposes.
If a deduction for capital works is to be allowable, the property must be used in a deductible way as described in section 43-10 of the ITAA 1997.
The annual capital works deduction allowable is percentage of the construction expenditure for a period of time. Construction expenditure is the actual cost of constructing the capital works (section 43-25 of the ITAA 1997).
As discussed above, the property was not used for an income producing purpose from the date that you signed the contract. Therefore you are not entitled to claim a capital works deduction from this date.
Where the property is used to produce assessable income for only part of the 2013-14 financial year, you will need to apportion any deduction claimed to reflect this in the 2013-14 financial year.