Edited version of your written advice

Authorisation Number: 1012913356619

Date of advice: 19 November 2015

Ruling

Subject: Rental deductions

Question

Are you entitled to claim a deduction for the cost of insurance, building levy's and rates in relation to your rental property whilst it is unoccupied due to damage from poor workmanship of the builder?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You have a rental property.

Your rental property was uninhabitable during the relevant income tax year due to severe water damage as a result of substandard building techniques.

You have commenced legal action to have the repairs effected through the builder's home warranty insurance.

Whilst waiting for the completion of the legal proceedings you have continued to incur holding costs for the property consisting of insurance, building levy's and rates.

You will rent the property once the repairs have been completed.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 8-1

Reasons for decision

Summary

Holding costs which have been incurred whilst the rental property has been uninhabitable during the relevant income tax year are deductible.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for any losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed under section 8-1 of the ITAA 1997 for expenses to the extent to which they are of a capital, private or domestic nature.

In this case the holding costs have been incurred in respect of a rental property which was uninhabitable for a period during which no assessable income was produced. The property had been rented prior to, with the outlook to rent the property after the property becomes inhabitable again.

Taxation Ruling TR 2004/4 discusses the principles relating to the deductibility of interest prior to using an asset to earn income as considered by the High Court in Steele v FC of T 99 ATC 4242 (1999) 41 ATR 139 ('Steele'). It follows from Steele 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 the holding costs incurred are not preliminary or of a private or domestic nature. The period of outgoings is not too long as to lose the necessary connection between the outgoing and assessable income and the holding costs are incurred with the view of gaining or producing assessable income. Continuing efforts were made in pursuit of that end.

Therefore, the expenses of holding the property are an allowable deduction under section 8-1 of the ITAA 1997 during the period the property was uninhabitable.

ATO view documents

TR 2004/4

Other references (non ATO view, such as court cases)

Steele v FC of T 99 ATC 4242 (1999)

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

No.

Other relevant comments

Nil

Keywords

Deductions & expenses

Holding costs