Private ruling: interest and holding costs for land
Published: June 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to claim a deduction for your share of the interest, rates and other holding costs incurred in respect of vacant land, purchased with the intent of constructing a residential rental property, in the 20XX to 20VV financial years? | A1: No. | Q2: Are you entitled to claim a deduction for your share of the interest, rates and other holding costs incurred in respect of vacant land, purchased with the intent of constructing a residential rental property, in the 20XX to 20ZZ financial years? | A2: Yes.

Relevant facts and circumstances: You purchased a share in a vacant block of land for the construction of a rental property. A condition of the purchase contract was that plans had been approved by the developer. On settlement of the land purchase, you had the approved plans, and since then have sought approval of both the modified plans and construction loan. You have been on an overseas work assignment for several years, however you remain committed to the construction project. You had several discussions with the developers in relation to changing the approved plans. You also applied for a construction loan with the bank and this was discussed with them until 20XX, when it was decided to put the plans on hold until uncertainty regarding financing could be resolved. Your intention has always been to build a rental property on the land to derive assessable income. You have no private or domestic purpose for holding the land, and your intention is to build an income producing property. In the 20YYfinancial year, you had your construction finance re-approved. Since then you had further talks with the home designers on the price of construction due to design modifications. You had deposited additional funds with the designers in the 20ZZ financial year. Since then on 1 July 20ZZ stopped the work progressing due to funding and cost issues. In late 20ZZ you requested a refund of the building planning deposit following advice from the Design Review Committee that the house design was not suitable.

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, or relate to the earning of exempt income. Interest on funds used to purchase a property on which the taxpayer intends to build an income producing asset may be deductible, from the time of the acquisition of the property ( Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139) ( Steeles Case ). It follows from Steeles Case 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 activity, the requirement is not satisfied if for a period of time the venture becomes 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 incurred interest expenses and holding costs in relation to the land purchase. From the land purchase date you had minor changes made to the original plans, and loan discussions with your bank. You have had construction finance discussion at various times, and also further modifications to plans which each time, have had to be approved by the developer. After pausing from for a period of time due to uncertainty with finance, you again had the finance approved for construction. You then had discussions with the designer because of pricing increases, and deposited further funds with the developer for the next stage of approvals. You then decided to pause progress of the project because of funding and price increases. From that point in time the interest expenses and holding costs you have incurred in relation to the purchase of this land are not deductible as the necessary connection between outgoings and assessable income is too remote. It is accepted that your intention was always to construct a rental property on the land, and it is accepted that from the time you signed the pre-construction contract with the builder that you were making continuing efforts in pursuit of the construction to be used solely for income producing purposes. As the project is now paused and you have requested a refund of your building planning deposit, the period of time between signing of the pre-construction contract and any proposed completion date is considered to be so long that the necessary connection between the interest and other holding costs and the derivation of income is lost. Accordingly you are entitled to a deduction for your share of interest, rates and other outgoings relating to this property, including the outgoings associated with the vacant land from the time the pre-construction contract was signed until the time the project was paused at the end of the 20ZZ. financial year.