Edited version of private advice

Authorisation Number: 1051701620927

Date of advice: 18 June 2020

Ruling

Subject: Rental property deductions

Question 1

Are you entitled to a tax deduction for your portion of expenses incurred on the purchase and holding of vacant land with the intention to build a dwelling for investment purposes for the income year ending 30 June 20XX?

Answer

Yes, under section 8-1 of the ITAA 1997 you are entitled to a deduction for interest incurred on funds borrowed to finance the purchase of vacant land, and for any associated holding costs connected with that land, as you intend to construct a house which will be used for future income producing purposes.

Question 2

Are you entitled to a tax deduction for your portion of expenses incurred on the purchase and holding of vacant land with the intention to build a dwelling for investment purposes for the income year ending 30 June 20XX and onward?

Answer

No

This ruling applies for the following period(s)

Year ended 30 June 20XX.

Year ended 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

You purchased a block of land

You acquired a loan for $XXX to purchase the land.

You intend to build a dwelling on the land.

You will rent the dwelling when construction is complete

You will apply for a construction loan when the costs are known.

During the 20XX income year there were no expenses incurred.

During the 20XX income year expenses including interest council rates and land taxes were incurred.

You could not commence the preparation and building of the dwelling in the 20XX financial year.

You are taking active steps to commence preparation of works in the 20XX financial year.

You settled on a builder to design the home and lodge the development applications (DA).

All DA's are pending as such no building construction has commenced.

The only expenses incurred to date are the interest on the loan, the council rates and the land tax.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-102

Question 2

Reasons for decision

Subsection 26-102(1) of the ITAA 1997 states that if:

(a) at a particular time, you incur a loss or outgoing relating to holding land (including interest or any other ongoing costs of borrowing to acquire the land); and

(b) at the earlier of the following (the critical time):

(i) that time;

(ii) if you have ceased to hold the land - the time just before you ceased to hold the land;

there is no substantial and permanent structure in use or available for use on the land having a purpose that is independent of, and not incidental to, the purpose of any other structure or proposed structure;

you can only deduct under this Act the loss or outgoing to the extent that the land is in use, or available for use, in carrying on a business covered by subsection (2) at the time applying under subsection (3).

This means that from the introduction of the legislation on 1 July 2019 income tax deductions to taxpayers will be denied for losses and outgoings incurred in holding vacant land, regardless of when acquired, to the extent the land is not at the time of incurring the expense or outgoing

·         used or held available for use by the entity in the course of carrying on a business in order to earn assessable income; or

·         used or held available for use in carrying on a business by:

-        an affiliate, spouse or child of the taxpayer; or

-        an entity that is connected with the taxpayer or of which the taxpayer is an affiliate

Section 26-102(4) states that for the purposes of paragraph (1)(b), treat a building as not being a substantial and permanent structure if it is *residential premises constructed, or *substantially renovated, while you hold the land unless:

(a) the residential premises are lawfully able to be occupied; and

(b) the residential premises are:

(i) leased, hired or licensed; or

(ii) available for lease, hire or licence.

This means that land is vacant until the structure is lawfully able to be occupied and used or available for use (e.g. no deduction during construction).

Expenses for which deductions will be denied that would ordinarily be a cost base element (such as borrowing expenses and council rates) may be included in the cost base of the asset for capital gains tax (CGT) purposes when sold.

In your circumstance you have purchased a block of land which you intend to build a dwelling on and rent the property out.

You could not commence the preparation and building of the dwelling in the 20XX financial year.

You are currently taking active steps to commence preparation of works in the 20XX financial year however, no building construction has commenced at this point in time.

Conclusion

As there is no substantial and permanent structure in use or available for use on the block of land, deductions will be denied for losses and outgoings incurred in holding the vacant block of land from 1 July 20XX onwards.

ATO view documents

Taxation Ruling TR 95/25 Deductions for interest under section 8-1 of the ITAA 1997

Taxation Ruling TR 2004/4 Deductions for interest incurred prior to the commencement of, or following the cessation of relevant income earning activities