Private ruling: Rental property expenses
Published: July 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and Answer | Are you entitled to claim deductions for the holding costs on a vacant block of land held with the intention of constructing a residential rental property that will produce future assessable income? | Yes.

Relevant facts and circumstances: You purchased land and intend to complete the building of a residential rental dwelling (a house) on the land after purchase in about 18 to 30 months. You intend to use the property to produce rental income. You have incurred expenses for rates, water charges, land tax and interest expenses with regard to the property prior to the completion of the building of the residential rental property: You settled on the vacant block of land. You borrowed funds to purchase the land. You have taken steps to have plans drafted for the proposed building of a residential rental dwelling on the land. These plans are still being finalised before being submitted to local council for building approval. You have been doing everything possible to get the project started, but have been held up longer than previously intended.

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) provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature. 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. You have incurred interest on a loan which was used to purchase a vacant block of land with the sole intention of constructing an income producing dwelling. You have also incurred various holding costs, such as rates, water charges and land tax. The period of time between the purchase of the land and the commencement of construction is not considered to be so long that the necessary connection between the interest and holding cost outgoings and the derivation of income is lost. You intend that your property will become income producing approximately X months after the purchase of the land. You have been doing everything possible to get the project started but have been held up longer than previously intended. It is considered that in these circumstances you are entitled to claim a deduction for interest expenses and holding costs attributed to the property.