Private ruling: Interest expenses
Published: April 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the interest incurred on your property while it was being repaired/improved? | A1: No.

Relevant facts and circumstances: You purchased a rental property. The property was rented for a number of years. You were unable to get another tenant so you put the house on the market. You were unable to sell the house and feedback was that it required too much work. You decided to renovate the property. You decided to keep the property. The property has been tenanted again after a number of years without a tenant.

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 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. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. 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. The Commissioner of Taxation has issued Taxation Ruling TR 2004/4 which considers deductions for interest incurred prior to the commencement of income earning activities. TR 2004/4 states that it is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. The ruling 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 • continuing efforts are undertaken in pursuit of that end. Interest in relation to a property that is being repaired or renovated with the intention of renting it out in the future will be deductible if the criteria set out above are met. Having regard to your whole circumstances, including the period of time the property was untenanted and the work undertaken, the interest expense relating to the property while it was not available for rent is not considered to be incurred in gaining or producing assessable income. It is not considered that you have made continuing efforts in respect of preparing the house to be rented. The length of time between when the property ceased to be rented and the time it was rented again is considered to be so long that the nexus to the previous income earning activities is broken and outgoings are incurred at a point 'too soon' before the commencement of the new income producing activity when the property was tenanted again. Accordingly you are not entitled to a deduction for the interest you incurred in relation to your property while it was not available for rent.