Private ruling: Subdivision
Date of advice: 17 October 2025
Published: 1 December 2025
Ruling period: Period ended DD MM YY | Period ended DD MM YY | Period ended DD MM YY | Period ended DD MM YY | Period ending DD MM YY
Date scheme commenced: DD MM YY

Ruling: Q1: Are you entitled to a deduction for the interest expenses incurred on the loan amount of $X from when the initial loan was established? | A1: No. | Q2: Are you entitled to an apportioned deduction for the interest expenses incurred on the loan amount of $X from DD MM YY, following the first drawdown of the construction element of the loan? | A2: Yes. | Q3: Are you entitled to a deduction for the interest expenses incurred on the loan amount of $X from DD MM YY following the completion of a permanent structure that is legally able to be occupied and available for rent? | A3: Yes.

Relevant facts and circumstances: On DD MM YY you entered into a contract to purchase vacant land at Address A for the purchase price of $X. On DD MM YY you entered into a building contract to build a dwelling on the property for the price of $X to be paid in 5 progress payments. On DD MM YY you applied for a loan of $X with Bank A for the purchase of the land and the building costs. The loan product was a Loan Type A. On DD MM YY the vacant lot was registered with council. On DD MM YY an amount of $X (the loan) was deposited into your bank account with Bank A. On DD MM YY you withdrew $X as partial payment for the land. On DD MM YY you withdrew $X for payment of the property. On DD MM YY settlement of the vacant block took place. On DD MM YY you withdrew the amount of $X as the final payment on the property. The excess amount of $X was refunded to you on settlement. On DD MM YY you submitted a development application with Company A which was approved on the same day. In MM YY construction of the dwelling on the vacant property started. On DD MM YY two separate withdrawals of $X and $X were made to pay the first and second progress payments on the build. On DD MM YY the amount of $X was withdrawn as the third progress payment on the build. On DD MM YY the fourth progress payment of $X was withdrawn and paid. On DD MM YY you appointed Real Estate Agency A as the real estate agent for letting the property. On DD MM YY a withdrawal of $X was made for the final payment on the build. The total amount of the loan that was used for the purchase of the property and the build was $X. On DD MM YY the property was advertised for rent. On DD MM YY tenants moved in.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(2)(d) | Income Tax Assessment Act 1997 section 26-102

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. Although the requirements of section 8-1(1) of the ITAA 1997 are met, a deduction is not allowable due to the limitation of section 8-1(2)(d) and section 26-102 of the ITAA 1997. From 1 July 2019, deductions are limited for losses or outgoings that relate to holding vacant land. Some exclusions apply. You cannot claim a deduction for interest expenses to acquire vacant land. You are entitled to an apportioned deduction for the loan interest incurred in relation to the construction of the dwelling prior to the dwelling being lawfully available for rent. Council rates are holding costs associated with the vacant land and are not deductible until the new dwelling can be lawfully occupied and is available for lease. Interest expenses incurred on the total loan monies borrowed (land and construction costs) can only be deducted from the date the Property is lawfully able to be occupied and is available for lease. For more information on interest deductions relating to rental properties, search QC 101711 at ato.gov.au. | Detailed Reasoning - Detailed reasoning: 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. 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. Interest on a loan used to purchase a property which is rented or available for rent is an allowable deduction under section 8-1 of the ITAA 1997. Taxation Ruling 95/25 ('TR 95/25 ') Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view on the deductibility of interest expenses following the Full Federal Court decision in FC of T v. Roberts; FC of T v. Smith 92 ATC 4380; (1992) 23 ATR 494 (Roberts and Smith). The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. Paragraph 3 of TR 95/25 sets out the general principles relevant to the question of whether interest is deductible under section 8-1 of the ITAA 1997: • There must be a sufficient connection between the interest expense and the activities which produce assessable income. The test is one of characterisation, and the essential character of the expenses is a question of fact to be determined by reference to all the circumstances. • The character of interest on money borrowed is generally ascertained by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower (the 'use' test). • Regard must also be had to all the circumstances, including the objective purpose of the borrowing and the nature of the transaction or series of transactions of which the borrowing of funds is an element. In some cases, your subjective purpose, intention or motive may be relevant (the 'purpose' test). Broadly, subsection 26-102(1) of the ITAA 1997 denies a deduction for losses or outgoings relating to holding land on which there is no substantial and permanent structure in use or available for use. In certain circumstances you may be excluded from the operation of the section, such as if the land is used in carrying on a business, you lease the land to an entity carrying on a business, the land is held by primary producers, or you are a particular kind of entity. There are other exceptions to this section. However, the operation of these exceptions is not addressed in this Ruling. Leaving aside business, entity, or primary production exclusions, 3 tests determine whether the section applies to a land holding: • Is there a substantial and permanent structure on the land? • If there is a structure, is it in use or available for use? • If there is a structure available for use, is it independent of and not incidental to the purpose of any other structure, or proposed structure on the land? A substantial structure is significant in size, value, or some other criteria of importance in the context of the property. To be permanent, a structure needs to be fixed and enduring. In the context of section 26-102 of ITAA 1997, we do not consider the costs of repairing, renovating, or constructing a structure on the land, or any interest or borrowing costs (to the extent they are associated with repairs, renovation or construction), to be a loss or outgoing related to holding land. | Detailed Reasoning - Interest expenses incurred on vacant land: The operation of section 26-102 and paragraph 14 of Taxation Ruling TR 2023/3 Income tax: expenses associated with holding vacant land means that your intention to use the property to derive rental income is no longer sufficient by itself to claim a deduction for expenses where no income can be derived because the property is either not able to be occupied or not available for rent. See Example 2 at paragraph 14 - residential vacant land in TR 2023/3 14. Individual A owns a vacant block in a residential area on which they intends to build a rental property. The block is fenced on 3 sides and has a small shed. Individual A stores tools and equipment in the shed to maintain the block. The fence and shed are not substantial and permanent structures with a purpose that is independent of any other proposed structure on the residential block. They exist to support the use and function of the proposed rental property. For the purposes of subsection 26-102(1), the land is considered vacant and deductions for the costs of holding the land are denied. In your case, at the time the relevant interest expenses were incurred, you were not using the vacant land in carrying on a business, nor were you leasing the land to an entity carrying on a business. You were also not an entity of the type specified in section 26-102 of the ITAA 1997. Your initial construction loan drawdown was not made until DD MM YY. This means you cannot claim a deduction for interest expenses incurred between the establishment of the loan and DD MM YY, because these interest expenses are considered to be the cost of acquiring and holding vacant land. | Detailed Reasoning - Interest expense for construction purposes: Where the loan is for the purchase of the land loan and for construction of a dwelling on it, a deduction will only be available for the element of the loan interest and other borrowing costs that relate to the construction of the dwelling and the interest expenses will need to be apportioned. See Example 6 at paragraph 27 - interest expense for multiple purposes in TR 2023/3 27. Individual A takes out a mortgage to purchase a vacant block of land in September 2019. Individual A intends to build a house on the land (which they will rent out). Individual A does not carry on a business. Individual A takes out a separate loan for the construction of the house. Individual A will not be able to claim a deduction for their interest expense which relates to acquiring the land until the house is lawfully able to be occupied and leased or available for lease. If a deduction is otherwise available for the construction loan interest expense, Individual A will not be prevented from deducting the expense by section 26-102. In your case, you are entitled to an apportioned deduction for the loan interest expenses incurred for the construction of the dwelling from DD MM YY (the date of the initial construction loan drawdown). | Detailed Reasoning - Interest expenses relating to holding land - new construction: Pursuant to subsection 26-102(4), residential premises that you construct or substantially renovate are disregarded as a 'substantial and permanent structure' unless they can lawfully be occupied and are leased, hired, or licensed (or available for lease, hire or licence). Subsection 26-102(4) applies throughout your ownership period of the land. This means that at all times, newly constructed or substantially renovated residential premises must be lawfully able to be occupied, and either • leased, hired, or licensed, or • available for lease, hire or licence. See Example 5 at paragraph 23- new construction 23. Individual A purchases vacant land on 1 July 2019 and builds a house on the land. He obtains an occupancy certificate on 9 February 2020. Individual A lists the property with a real estate agent for lease on 1 March 2020. Any holding costs that Individual A would otherwise be entitled to deduct from 1 March 2020 will not be denied by section 26-102, as from this date the house is lawfully able to be occupied and is available for lease. In your case, interest expenses can only be deducted from the date the property is lawfully able to be occupied and is available for lease, which was DD MM YY. This means you can claim a deduction for interest expenses incurred on the total utilised loan amount of $X (land and construction costs) from DD MM YY.