Edited version of your written advice

Authorisation Number: 1012720982663

Ruling

Subject: Holding costs

Question 1

Are you entitled to a deduction for interest and other holding costs on a block of land between September 20XX and May 20YY?

Answer

No.

Question 2

Are you entitled to a deduction for interest and other holding costs on a block of land after the date the loan to construct was approved?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2007

Relevant facts

You purchased a block of land in 2007 with the intention of building an investment property.

You were neither able to fund the investment yourself or borrow funds to do so.

You inability to borrow the funds from the bank after a number of applications was because of the Global Financial Crisis (GFC).

In 2009 you applied for finance to build the investment property and a primary place of residence on your block next door.

You were granted finance to the build primary place of residence and moved into that property in 2010.

You were finally able to obtain a loan to fund the construction of the property in 2013.

The construction commenced immediately and the property was rented out as soon as it was completed.

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) 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.

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

While we acknowledge that the GFC impacted on your ability to acquire a loan, it was your personal circumstances in not being in a financial position to borrow the necessary funds and your choice to build a primary place of residence rather than the investment property that prevented you from progressing your intentions. The period was so long that the necessary connection between the outgoings and producing assessable income has been lost.

It is considered that, up until your loan was granted, the expenses were incurred at a point too soon to be incurred in producing assessable income from the property.

Therefore, you are not entitled to a deduction for expenses related to holding the land up until the date that the loan was granted. After the loan was granted, the expenses were incurred to progress your intention to build the investment property.