Edited version of your written advice

Authorisation Number: 1013020603206

Date of advice: 18 May 2016

Ruling

Subject: Property expenses

Question

Are you entitled to a deduction for the holding costs associated with your property?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You have a relative who has a disability.

Your relative receives care at a private residence provided by your family.

You purchased the residence and it was set up for your relative's medical needs.

This property is not your principal place of residence.

Due to the circumstances, you cannot rent out these premises and treat it as a rental 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 (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.

The courts have considered the meaning of incurred in gaining or producing assessable income. In Ronpibon Tin NL Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 56 ALR 785; 8 ATD 431, the High Court stated that: 

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable income, it must be incidental and relevant to that end. The words incurred in gaining or producing assessable income mean in the course of gaining or producing such income.

Generally, expenses incurred relating to a property used for income producing purposes are deductible under section 8-1 of the ITAA 1997. Examples of this type of property are a rental property which is rented or available for rent and buildings used as part of a business activity.

Taxation Ruling TR 2004/4 considers deductions for interest incurred prior to the commencement of income earning activities and the implications of the decision of the High Court in Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case).

While Steele's Case deals with the issue of interest, the principles can be applied to other types of holding expenditure such as rates and insurance.

In 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 if:

• 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, you have purchased a property which is used to provide your relative with care. The use of the property is private or domestic in nature. Thus, the holding costs associated with this property are also of a private or domestic nature. They are not incurred in the course of gaining or producing assessable income.

Therefore, you are not entitled to a deduction for the holding costs (that is, the rates, insurance, land tax and general repairs and maintenance) that are incurred in relation to the property.