Private ruling: Holding costs
Published: June 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a full deduction for your share of the holding costs of the property prior to the property being ready for rent? | A1: No | Q2: Are you entitled to a deduction for a portion of the holding costs of the property prior to the property being ready for rent? | A2: Yes, refer to reasons for decision.

Relevant facts and circumstances: You have purchased a block of land with an intention to build residential property and rent out as soon as it becomes available to rent. The property is jointly and equally owned by you and your partner. During the relevant income year you and your partner have incurred expenditure in relation to the property. The construction of the rental property will be completed by early 20XX. You will earn non-assessable non-exempt income in addition to rental income in respect of the property.

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

Reasons for decision: Summary: Taxation Ruling TR 2004/4 considers deductions for interest incurred prior to the commencement of income earning activities and the implications of the decision of the High Court in Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 ( Steele's Case ). While Steele's Case deals with the issue of interest, the principles can be applied to other types of holding expenditure such as rates and water charges. In this case the interest incurred is not preliminary or of a private or domestic nature. The period of interest outgoings is not too long as to lose the necessary connection between the outgoing and assessable income and the interest is incurred with the view of gaining or producing assessable income. Continuing efforts are being undertaken in pursuit of that end. The same reasoning would apply to other costs incurred in holding the property.i.e borrowing costs, interest and council water and sewerage charges. Apportionment of expenditure is necessary where it serves both an assessable income producing end and some other end: ( Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). While the derivation of assessable income by way of rent is one objective, the receipt of the exempt income or non-assessable non-exempt (NANE) income is another. The rental expenses are not deductible to the extent they are incurred in gaining NANE income (paragraph 8-1(2)(c) ITAA 1997).