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Edited version of your written advice
Authorisation Number: 1051237355253
Date of advice: 19 June 2017
Ruling
Subject: Investment property loan interest and construction expense
Question 1
Is the interest paid on your investment property and construction loan tax deductible while the property is being constructed?
Answer
Yes
Question 2
Are the holding costs such as water rates, electricity and council rates tax deductible while the property is being constructed?
Answer
Yes
Section 8-1 of the Income Tax Assessment Act 1997 provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature.
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. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) .
In your circumstances the interest and rates expenses are not considered to be incurred as a prelude to income earning activities. Further we do not consider these expenses are private or domestic as you purchased the property as an investment property, and it has been income producing up until demolition for the rebuilding of another rental property.
Accordingly you are entitled to claim a deduction for the interest and holding expenses relating to your ownership of the rental property in the 2017-18 financial year.
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commenced on:
1 July 2017
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You bought an investment property and rented it out after settlement for less than five years.
You have a planning permit for further residential development on the site, and plan to commence demolition of the existing property soon.
You plan to rent the new properties after completion for some years, and you will then move into one of them as your principal residence.
You took out an investment property loan when you purchased the property; you later took out another construction loan.