Private ruling: Rental property expenses - interest
Published: October 2012
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Question and answer | Are you entitled to a deduction for interest incurred on a loan to build a rental property? | Yes.

Relevant facts and circumstances: You purchased an ownership interest in a block of land a number of years ago to construct a dwelling to be used for income producing purposes. You entered into a contract to build the dwelling a few months after the purchase of the land. A certificate of partial occupancy and use was issued in the relevant year. A dispute has arisen with the builder. You have refused to make any further payments to the builder and take ownership of the keys until this is completed.

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) states 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. Generally, expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction. 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; 99ATC 4242; (1999) 41 ATR 139 (Steele's case). It is not necessary to show that the interest was incurred in producing income of a particular year. Interest that is otherwise deductible is not excluded from deductibility simply because no assessable income was derived in the relevant year. The Commissioner limits the operation of Steele's case to circumstances where: · 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 of a private or domestic nature; · the period of interest outgoings prior to the derivation of relevant assessable income is not too long, taking into account the kind of income earning activities involved, that the necessary connection between the outgoings and assessable income is lost; · the interest is incurred with the one end in view, the gaining or producing of assessable income; and · continuing efforts are undertaken in pursuit of that end. While this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future. In your case you purchased a block of land with the intention of building a rental property on the land. A contract to build the dwelling was entered into. The dwelling has been built and there is a dispute. You are refusing to pay the builder and take ownership of the keys. The interest expense incurred relates to a property to be used for income producing purposes, and is not considered to have been incurred at a point too soon before the commencement of the income producing activity. There is no private or domestic purpose for holding the property, as your intention is to have an income producing property. Nor is the length of time between the purchase of the land and the building of the rental property, so long that the necessary connection between the interest outgoings and the assessable income is lost. The length of time has been necessary due to factors beyond your control namely the dispute. You are refusing to pay the builder any more money and to take possession of the keys until the dispute has been resolved as per the plans. Based on the information provided, the interest incurred in relation to the loan amount used to purchase the land and build the rental property, is an allowable deduction under section 8-1 of the ITAA 1997.

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