Private ruling: Rental property expenses
Published: April 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are payments made deductible? | A1: Yes.

Relevant facts and circumstances: You settled on a new parcel of land with the intention (that still stands) to build a rental property on it. Under the purchase scheme, you must pay an amount per annum of the unimproved value of the block. At any point you can purchase the block for its unimproved value. Past land and rent payments do not offset or otherwise reduce the purchase price. You were required to commence building the dwelling on your block within one year, and, after receiving an extension of time and an approval to build, you commenced building during the required period and must complete construction of the dwelling within the required 12 month period. Upon its completion, you will not use the property as your personal residence but rent it on commercial terms. Relevent legislative provisions Income Tax Assessment Act 1997 Section 8-1


Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 Section 8-1 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they necessarily incurred for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature. In certain cases, it is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 is about deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities. It considers the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 ( Steele's Case ) and provides guidance about when interest, incurred in a period prior to the derivation of relevant assessable income, will be not be incurred 'too soon' to preclude deductibility in relation to holding an income earning asset. The principle in Steele's Case has been relied upon by the Commissioner to allow the deductibility of certain holding costs for borrowing expenses on purchase of vacant land and the construction of a house for future income producing purposes (ATO ID 2001/478); for holding expenses on vacant land held for future income producing purposes (ATO ID 2001/479); and for letting fees incurred prior to property being available for rent (ATO ID 2002/1096). To the contrary, the Commissioner has ruled on a number occasions that certain costs related to acquiring income earning assets are incurred at a point to soon, such as the non-deductibility of the cost of accommodation when inspecting potential properties for purchase (ATO ID 2001/535); legal expenses for preparing a loan agreement (ATO ID 2002/768); and property investment seminar expenses for future investment properties (ATO ID 2003/324). In your case, where land rent is paid in relation to land to be used for the construction of a rental property, the principles in Steele's Case provide the payments will be deductible for relevant periods prior to the earning of assessable income from the rental property.