Edited version of private advice

Authorisation Number: 1052413411917

Date of advice: 30 June 2025

Ruling

Subject: Income tax - deductions

Question

Are your holding costs and the interest paid on your investment property's 'original loan' and 'construction loan' tax deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) while the property is being substantially renovated and unavailable for rent?

Answer

No.

This ruling applies for the following periods:

Income tax year ending 30 June 20YY

Income tax year ending 30 June 20YY

Income tax year ending 30 June 20YY

The scheme commenced on:

1 April 20YY

Relevant facts and circumstances

1.  In September 20YY, you jointly acquired the Property, with settlement occurring November 20YY.

2.  The Property has been available to rent since acquisition.

3.  The Property prior to construction was XXXm2.

4.  The Property has been tenanted since acquisition and has never been vacant or used for private or domestic purposes.

5.  The Property is managed by an agent and rental income is set at market rate determined by the agent.

6.  The Property was purchased through a mortgage with variable interest (Original Loan).

7.  The mortgage has never been refinanced and the loan has not been used for anything other than the purchase of the Property.

8.  You have registered the Property as an investment property with another property being your principal place of residence.

9.  The Property is in need of some integral works, therefore you will be undertaking these works starting April 20YY.

10.  The works will ensure the house is worthy of generating a substantially higher rental income when it returns to the market.

11.  The bank has loaned the money for the works based on the higher rental income (Construction Loan).

12.  The tenants will vacate the Property upon commencement of works and the works will take some months to complete.

13.  At the time of Ruling, DA is approved and BA has been submitted.

14.  Once finished, the Property will be XXXm2.

15.  You have provided the works estimate from the Builder as outlined below:

•                     All documentation including warranty and levies

•                     Connection of required services.

•                     All site and supervision requirements

•                     New in-ground swimming pool, pool surround and required accessories.

•                     Slide and raise existing house as required

•                     Termite control protection and treatment system

•                     Concreting of required areas, provide materials and consumables as required

•                     Exposed finish to driveway

•                     Blockwork and retaining walls as per plans, including waterproofing and drainage

•                     Split ducted air conditioning system capable of multi zones

•                     Electrical and labour components as per Electrical Provider quote

•                     Solar inverter and solar panels

•                     Plumbing fixtures and fittings

•                     Appliances including BBQ

•                     Heat pump

•                     Timber framing and structural steel where required for walls, floor and roof

•                     Tiling

•                     Epoxy flake finish to garage floor

•                     Timber flooring

•                     Pavers and steppers

•                     Other external accessories

•                     Internal stairs and balustrade

•                     Fascia, gutter and roofing, including roof water and stormwater run-off system

•                     Windows and doors as per provider quote

•                     Skylights

•                     External cladding and wall insulation

•                     Internal plasterboard

•                     Internal features

•                     Cabinetry, benchtops and accessories

•                     Shower screens and mirrors

•                     Architraves, skirtings, internal doors and hardware

•                     Painting

•                     Landscaping

•                     Garage door

•                     Garden taps

•                     Hot and cold outdoor shower

•                     Other accessories and warranties

Relevant legislative provisions

Income Tax Assessment Act 1997Section 26-102

Income Tax Assessment Act 1997Section 8-1

Reasons for decision

Issue 1

Question 1

Summary

Section 26-102 of the Income Tax Assessment Act 1997 (ITAA 1997) disallows all deductions in relation to residential premises (including interest or any other ongoing costs of borrowing) whilst the property is being:

•                     constructed; or

•                     substantially renovated

unless the property is available for rent during the period of construction or substantial renovation or the property forms part of a business.

Detailed reasoning

Section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, or is necessarily incurred in carrying on a business for that purpose. However, you cannot deduct a loss or outgoing under this section that is of a capital, private or domestic nature.

Generally, an expense incurred for income producing purposes is deductible under section 8-1 of the ITAA 1997, to the extent that it is not capital, private or domestic in nature. The essential character of the expense is a question of fact to be determined by reference to all the circumstances.

However, paragraph 8-1(d) of the ITAA 1997 states a loss or outgoing is not deductible under this section to the extent that a provision of this Act prevents you from deducting it.

Subsections 26-102(1) and 26-102(4) of the ITAA 1997 deny a deduction for all losses or outgoings (that may otherwise satisfy section 8-1 of the ITAA 1997) relating to the holding of residential premises (including interest or any other ongoing costs of borrowing to acquire the premises) whilst they are being:

•                     constructed; or

•                     substantially renovated

unless the premises are leased, hired or licenced (or lawfully available for lease, hire or licence) during the period of construction or substantial renovation or the premises form part of the carrying on of a business.

The holding of a residential investment property does not amount to the carrying on of a business (Example 1 of Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners).

'Substantial renovations' is defined in section 995-1 of the ITAA 1997 as taking the meaning in 195-1 of A New Tax System (Goods and Services Tax) Act 1999 which is as follows:

...renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

Application to your circumstances

You purchased the Property and it has been rented since acquisition. From April 20YY, your tenants moved out and works will be undertaken which are expected to last some months. The works are substantial renovations and the premises are not lawfully available for occupation during this period. Further the holding of a residential rental property does not amount to the carrying on of a business. Therefore, deductions are not allowed for your holding costs or the interest paid on your investment property's 'original loan' or 'construction loan' because of section 26-102 of the ITAA 1997 until the property is again lawfully available for rent following completion of the renovations.