Edited version of private advice

Authorisation Number: 1052375572633

Date of advice: 24 March 2025

Ruling

Subject: Rental property expenses

Question 1

Are the holding costs incurred in the 20YY income year in respect of your rental property deductible under section 8-1 of the Income Tax Assessment Act 1997 in the circumstances described?

Answer 1

Yes.

This ruling applies for the following period:

Income year ended 30 June YY

Relevant facts and circumstances

The taxpayer and their spouse jointly owned a rental property, a unit, for a number of years. There are a number of units in the building.

The taxpayer uses a managing agent to lease the property. The unit was rented out until it was vacated sometime during the income year ended 30 June 20YY. It was not used for private use by the taxpayer and their spouse any time during their period of ownership.

The owners corporation for the building identified the need for significant repairs and improvements to the building. To enable the remediation works to be undertaken, the building was required to be vacated.

The taxpayer's tenants vacated the building and remediation works commenced shortly afterwards in the 20YY income year.

The estimated date of completion of the above building works is in a later income year with the rental property available for tenanting sometime soon after.

The taxpayer anticipates that the remediation works, once completed, will add value to the building for which a higher rental income will be sought for the unit. The taxpayer intends to keep the unit as a rental property once the remediation works are completed.

Since the time that the unit was vacated, the taxpayer and their spouse have paid 'holding costs' in respect of the unit. These costs comprise of water charges, land taxes, quarterly body corporate strata levy and council rates.

These costs do not include any amounts or levies paid to the body corporate to fund the remediation works

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

All legislative references below are reference to the Income Tax Assessment Act 1997.

Section 8-1 allows you a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing your assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Case law has established that it is not necessary that the expenditure in question should produce assessable income in the same income year in which the expenditure was incurred- see Fletcher & Ors v FC of T (1991) 173 CLR 1 at 16-17; 91 ATC 4950 at 4957.

In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's case), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production.

While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including rates, levy and other costs of owning an investment property.

Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities in considering the above decision, concludes at paragraph 9 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. While this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future.

In Ormiston v. FC of T 2005 ATC 2340 a deduction for interest and other expenses was allowed in respect of the property even though the property had still not produced any income after nearly five years. However, it was shown that the taxpayer had identified what needed to be done at the outset and over the whole period had made continued efforts in pursuit of the property becoming income producing.

In the present circumstances, the taxpayer has owned the rental property for a number of years and has continuously rented out the property since that time. The taxpayer's property was vacated during the 20YY income year, and remains vacant because of the remediation works that are being undertaken to the taxpayer's property, and also the building.

However, as soon as the remediation works are completed, the taxpayer will again rent out the property.

In light of the above, it is considered that the holding costs of the property:

•                     was not incurred too soon or preliminary to the taxpayer's rental income earning activities. The taxpayer had rented out this property for a number of years prior to the remediation works commencing.

•                     are not private or domestic in nature - the property was not used nor is it intended to be used for any private use by the taxpayer or their spouse;

•                     was not incurred for a period that was too long to suggest that there is another purpose other than to produce rental income from the property;

•                     was incurred with one end in view by the taxpayer i.e. to generate income from the property albeit in a later year of income.

Further, the exclusions from section 8-1(1) deductibility do not apply here. The holding costs are considered not to be:

•                     capital in nature - they are recurrent expenses and do not provide any enduring benefit;

•                     private or domestic; or

•                     relate to the earning of exempt income.

Therefore, the taxpayer is entitled to a deduction for the holding costs under subsection 8-1(1).