Edited version of private advice

Authorisation Number: 1052314513314

Date of advice: 8 October 2024

Ruling

Subject: Deductions - rental property

Question

Are you entitled to a deduction for the holding costs and interest expenses that you incurred for the studio on your property whilst it was not genuinely available for rent?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In 20XX, you constructed a studio above the garage of your residential property.

You intended to use the studio for income producing purposes.

Once completed, the studio was rented out for short periods, however due to Covid-19 restrictions in 20XX, you ceased renting it.

A tree on your property became infested with vermin which resulted in the bark shedding, and the tree losing its leaves and foliage. As the tree had provided privacy for the studio, you decided not to rent the studio during the 20XX income year.

You addressed the vermin infestation in the tree by reducing the branch volume in the tree and took measures to rejuvenate the tree and restore it.

In XX/20XX, you reopened the studio for short term rentals on an accommodation reservations system.

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.

In determining whether an expense is deductible for income tax purposes it is necessary to establish a direct connection between holding a property to generate rental income and the expenses associated with holding that property. Where this connection has been established for a rental property, a landlord can deduct the expenses associated with holding that property to generate income. Examples of expenses that may be deductible under section 8-1 of the ITAA 1997 as general deductions include cleaning, council rates, insurance, interest on the mortgage, property management fees, and strata fees.

Taxation Ruling 2004/4: Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities outlines that where interest has been incurred over a period after the relevant borrowings (or assets representing those borrowings) have been lost to the taxpayer and relevant income earning activities (whether business or non-business) have ceased, it is apparent that the interest is not incurred in gaining or producing the assessable income of that period or any future period. However, the outgoing will still have been incurred in gaining or producing 'the assessable income' if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period.

If the expense was for the purpose of producing the rental income, you can claim a deduction. If not, the property rented needs to be genuinely available for rent, meaning the tenant is renting the property or there are active and continuing efforts to rent the property. Ordinarily, it is ensuring the property is being advertised to the public at appropriate market rates and that tenants are likely to rent it.

In your case, you have not advertised for tenants nor generated any income from your studio in the relevant financial year. As your studio was not advertised, it cannot be considered as being genuinely available to rent. As the studio generated no income and was not genuinely available to rent, it cannot be considered to have been held to generate income. Therefore, the holding costs and interest expenses you incurred for the studio in the relevant income year cannot be considered to have arisen from an income generating activity.

Therefore, the holding costs and interest expenses that were incurred during the 20XX income year are not deductible under section 8-1 of the ITAA.