Private ruling: Deductibility of loan interest
Published: March 2013
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and answers: | 1. Are you entitled to a deduction for loan interest from the time your rental property construction venture became dormant? | No. | 2. Did your rental property construction venture become dormant in late 20XX? | Yes.

Relevant facts and circumstances: You purchased vacant land with the intention of constructing dwellings for rental. Since acquiring the land you have undertaken activities such as getting a survey updated, receiving quotations for the construction of cabins, constructing a site shed, installing a container, installing a water tank, undertaking earthworks and commencing the development application process. The last development activity you undertook was in 20XX. There have been no development activities since 20XX due to financial difficulties you were having, and you decided to place the venture on hold in 20YY. It remains your intention to recommence the venture once your financial position improves. You may be in a position to recommence the venture in 20ZZ.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 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. 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 (TR 2004/4) provides guidance on when interest on a loan used to purchase land on which a person intends to build a rental property is deductible. The ruling considers the decision in Steele v. Federal Commissioner of Taxation (1999) 99 ATC 4242 (1999) 41 ATR 139 ( Steele's case ) and states 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 Steele's Case specifically deals with the issue of interest, the principles can also be applied to other types of expenditure such as land tax and council rates. In considering the final of the above conditions, TR 2004/4 states that a test of 'continuing efforts' does not require constant development activity. However, if a venture becomes truly dormant and the holding of the asset is passive, loan interest will not be deductible even if there is an intention to revive that venture at some time in the future. In your case, you purchased land on which you intended to construct dwellings for rental. You made continuing efforts to pursue the venture such as developing the land, obtaining quotes and commencing the approvals process; however, the last of these actions occurred in 20XX. There have been no further development activities since 20XX due to financial difficulties you were having, and you decided to place the venture on hold in 20YY. You are hopeful of reviving the venture some time in 20ZZ. The information you provided shows that your plans to build income-producing dwellings on your land became dormant from the time your continuing efforts in pursuing the venture ceased in 20XX. Your holding of the asset from that time is passive, even though your intention is to continue the venture at some time in the future. The reason for the delay is your financial position and not any factors intrinsic to the property development itself. Therefore, the interest expenses you have incurred in relation to the purchase of the land are not deductible from time the venture became dormant in 20XX. However, you may once again deduct interest expenses should you revive the venture in the future.

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