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Edited version of private advice
Authorisation Number: 1012641151051
Ruling
Subject: Rental property interest
Question
Are you entitled to a deduction for interest incurred on a loan used to purchase land and construct a rental property from the commencement of the loan?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commenced on
1 July 2012
Relevant facts
You purchased land in mid 20XX and commenced building a rental property in late 20XX.
You expect to have the house completed in mid 20YY and will rent it out soon after.
You have incurred interest expenses on a loan used to purchase the land and build the property.
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 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, or relate to the earning of exempt income.
In Steele v. FC of T (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. It follows from Steele's Case 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.
You have incurred interest on a loan used to purchase land and build the house which will be rented as soon as it is completed. You started constructing the house soon after you purchased it. As you have undertaken continuing efforts to build the rental property it is considered that the necessary connection between the interest outgoing and the derivation of income is not lost.
As your property will become income producing, you are entitled to claim a deduction for interest expenses incurred on the loan from the commencement of the loan.