Edited version of your written advice

Authorisation Number: 1051335415210

Date of advice: 6 February 2018

Ruling

Subject: Investment property

Questions and answers

1. Are you entitled to deduct the cost of various fees and expenses incurred for a property used to earn assessable income?

Yes

2. Are you entitled to deduct the cost of borrowing expenses on a loan taken out to finance the purchase of the property used to earn assessable income?

Yes

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You purchased an investment unit in a resort-styled facility (the property).

The property is located in an area which attracts local and international tourists and which is experiencing rapid growth.

The property had been receiving rental income consistently and had required relatively minimal upkeep.

Tourism numbers in the region commenced a significant decline after a natural disaster.

The property was receiving more intermittent income over the next few years until another natural disaster devastated the region. This had a significant impact on the resort, local businesses, and communities and surrounding area.

Your property was affected by the storms but only minor repairs were needed. However, the resort required significant repairs as some buildings were completely destroyed and the region is still in the process of being rebuilt.

There were significant factors as a result of the tropical cyclones that effected tourism at the resort. Most of the guest facilities (including the golf course and swimming pools) which provide a major attraction to the resort were damaged which deterred a lot of tourists.

During the income year your property was genuinely available for rent and advertised through a real estate agent. You have provided copies of documents to support this.

You anticipate more frequent leasing over the next twelve months as the area rebuilds and tourists return.

For the income tax return for the income year ended 30 June 2017 you incurred expenses in relation to the property:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-25

Reasons for decision

Body corporate fees, council rates, insurance, interest on loan and other holding expenses

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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.

Expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997, if the property is rented or available for rent in the income year in which you claim the deduction.

In your situation you purchased a property with the intention of renting it to produce assessable income. It was available for rent throughout the income year of the ruling. However, due to natural disasters and the consequent downturn in the tourist trade, you were unable to attract any customers or earn any rental income during this period. However expenses associated with holding your property were incurred in relation to your income earning activity.

Accordingly, you are entitled to deductions under section 8-1 of the ITAA 1997 for the expenses relating to the purchase and holding of property in the income year of the ruling.

Borrowing expenses

Borrowing expenses are expenses directly incurred when taking out a loan for a property. They include establishment fees, legal fees, stamp duty on the loan and valuation fees. Borrowing expenses will be considered deductible under section 25-25 of the ITAA 1997 to the extent that the borrowed moneys are used or are to be used during that income year for income producing purposes.

Borrowing expenses incurred prior to the commencement of income earning activities may also be deductible. The principles established in Steele’s case and considered in TR 2004/04 (discussed under the heading ‘Interest, bank charges, rates, land tax and other holding expenses’ above) apply equally to borrowing expenses.

You have taken out a loan to purchase a residential dwelling for the purpose of producing assessable income. As a result of this you have incurred borrowing expenses.

Accordingly, you are entitled to a deduction for these borrowing expenses. If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever timeframe is lesser. If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year that you had the loan.