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Edited version of private advice
Authorisation Number: 1051589040389
Date of advice: 1 October 2019
Ruling
Subject: Interest deduction
Question 1
Are you entitled to a deduction for interest on a loan taken out to build an income producing property?
Answer
No.
Question 2
Can interest expenses incurred in prior years be included in your 20XX income tax return?
Answer
Not applicable.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You and two other investors purchased land in 20XX with the intention of building an income producing property.
You owned 1/3 of the property with the other two investors owning the remaining 2/3.
You have incurred interest on the loan since 20XX.
You borrowed $XXX to purchase your share of the land.
Initially the loan was a joint loan and it is now an individual loan.
There was no written agreement between you and the other investors in relation to the project.
In early 20XX when the land was purchased a site analysis was carried out on the land.
No report was provided in relation to this analysis.
You and the other investors could not agree on the size of the project.
After X months of disagreement you all agreed to put a temporary hold on the project.
In the 20XX income year you and one of the investors bought out the other investor.
Building has not yet commenced on the land.
You just recently engaged architects to draw up plans for the building.
The property remains non income producing.
The time line for the project completion is 3-5 years.
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.
It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 considers the decision in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR459 (Steele's case) and concludes 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.
TR 2004/4, in considering the final of the above conditions, states that a test of 'continuing efforts' would need to be set within the context of the normal time frames of the relevant industry. However, if a venture becomes truly dormant and the holding of the asset is passive, relevant interest will not be deductible even if there is an intention to revive that venture sometime in the future.
In your case you and two investors purchased land in early 20XX with the intention of building an income producing property.
Due to some disagreements amongst the investors the project has not progressed beyond the purchase of the land and a site analysis carried out in 20XX.
The project has been dormant since you and the other investors agreed to a temporary hold on the project which never ended.
In 2018 you and one investor bought the other investor out. There has been no construction commence on the property to date. You anticipate that the project will be completed in 3-5 years.
Your situation can be contrasted from that in Steele's case as the project has been dormant for many years.
The issues which have impacted the project proceeding have been due to the investors and not third party influences as in Steele's case.
Throughout the disagreements no progress was made on the project and it wasn't until 20XX when a decision was made to change the investors and proceed with the project. There have been no continuing efforts to progress the investment.
Therefore, you are not able to claim the interest as a deduction under section 8-1 of the ITAA 1997.