Private ruling: Rental property expenses - property not tenanted
Published: January 2012
Ruling period: Year ending 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to claim a deduction for your share of the rental property holding expenses during a period your co-owned rental property is unable to be tenanted as it is being reconstructed? | A1: Yes.

Relevant facts and circumstances: You and your spouse co-own a rental property which was tenanted up until the time it was flooded during the 2010-11 financial year when your tenant was evacuated. Your property sustained severe damage and you were advised that it would be preferable to demolish rather than repair the house and rebuild at a higher level. A contract to construct a new building was signed prior to the end of the 2010-11 financial year and the building works have commenced. You and your spouse intend to seek a new tenant once the construction of the house 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) 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. The principles in relation to the deductibility of expenses incurred in gaining or producing assessable income have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals. It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's case) , the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including rates and insurance. Taxation Ruling TR 2004/4, in considering the above decision, concludes 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 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 co-own a rental property which was rented out until part way through the 2010-11 income year, when you undertook a demolition and reconstruction of the property due to severe flood damage. However, as soon as the work is completed, you intend to again rent out the property. The expenses are not considered to be too soon; are not private or domestic; were not too long; there was one end in view and you have made continuing efforts. Therefore, you are entitled to a deduction for your share of the holding expenses including rates, insurance and interest.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.