Private ruling: rental deductions
Published: February 2015
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for interest, council rates, and water rates for the period the property was not rented? | A1: Yes

Relevant facts and circumstances: You own a rental property. Your tenant abandoned the property and caused damage to the property. You have been unable to rent the property for a period of X months while repairs and court proceedings have taken place. Once the property has been repaired and the legal action resolved the property will be available for rent.

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 (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 Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 ( Steeles Case ), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. It follows from Steeles Case 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 deals with the issue of interest, the principles can also be applied to other types of expenditure including local council, water and sewage, rates, land taxes and emergency services levies. Taxation Ruling TR 2004/4 discusses at paragraph 36, the concept of 'continuing efforts' and states that the concept of continuing efforts should not be taken to require constant on-site development activity. It adds further: a test of 'continuing efforts' would need to be set within the context of the normal time frames of the relevant industry. However, if a venture becomes truly dormant and the holding of the asset is passive, relevant interest will not be deductible even if there is an intention to revive that venture some time in the future. In your circumstances you have commenced legal proceedings to terminate the tenancy, recover unpaid rent and seek damages for the required repairs. Consequently we consider that there has been continuing efforts in making the property available for rent. Therefore the interest expense and holding costs such as council and water rates will remain deductible under section 8-1 of the ITAA 1997.