Private ruling: Rental expenses
Date of advice: 5 March 2026
Published: 20 April 2026
Ruling period: Year ending 30 June 20XX
Date scheme commenced: DD MM YYYY

Ruling: Q1: Can you claim a deduction for interest expenses on funds borrowed for land purchase before a permanent structure is legally able to be occupied and available for rent? | A1: No. | Q2: Can you claim a deduction for interest expenses on funds borrowed for the construction of an investment property? | A2: Yes. | Q3: Are expenses such as council rates, water rates, electricity and gas bills incurred during the construction of an investment property deductible? | A3: No. | Q4: Are your expenses such as council rates, water rates, electricity and gas bills incurred during the construction of an investment property added to the cost base? | A4: Yes.


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 | Income Tax Assessment Act 1997 subsection 26-102(1) | Income Tax Assessment Act 1997 subsection 26-102(4) | Income Tax Assessment Act 1997 Division 110 | Income Tax Assessment Act 1997 subsection 110-25(4) | Income Tax Assessment Act 1997 section 110-45

Reasons for decision: Summary: Section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings (including interest) to the extent they are incurred in gaining or producing assessable income, except where they are capital, private or domestic, or relate to exempt income. However, although the interest has an income-producing purpose overall (rental), a deduction is denied to the extent it relates to holding vacant land before a substantial and permanent structure is in use or available for use, under section 26-102 of the ITAA 1997 (and therefore limited by section 8-1(2)(d) where another provision prevents the deduction). | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings 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. Taxation Ruling 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 regarding the deductibility of interest expenses. As broadly outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income (paragraph 3(a) and paragraph 21). TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put (paragraph 3(b)). Subsection 26-102(1) of the ITAA 1997 provides that if: (a) at a particular time, you incur a loss or outgoing relating to holding land (including any interest or any other ongoing costs of borrowing to acquire the land); and (b) at the earlier of the following (the critical time): (i) that time, (ii) if you have ceased to hold the land - the time just before you ceased to hold the land; there is no substantial and permanent structure in use or available for use on the land having a purpose that is independent of, and not incidental to, the purpose of any other structure or proposed structure, you can only deduct under this Act the loss or outgoing to the extent that the land is in use, or available for use, in carrying on a business covered by subsection (2) at the time applying under subsection (3). Paragraph 26 of Taxation Ruling TR 2023/3 Income tax: expenses associated with holding vacant land states that, in the context of section 26-102 of the ITAA 1997, the costs of constructing a substantial and permanent structure on the land, or any interest or borrowing costs (to the extent they are associated with construction) are not considered a loss or outgoing related to holding land (see Example 6 in paragraph 27 of TR 2023/3. This means that a taxpayer who incurs interest and borrowing costs directly related to the construction can still claim deductions for such expenses. | Detailed Reasoning - Application to your circumstances: You borrowed under a combined land and construction facility to acquire vacant land and construct a residential dwelling that you intend to hold solely for long-term rental income, with no private use. The land purchase settled in MM YYYY, and you have incurred interest on the facility from settlement onwards as funds were drawn and the balance increased. For the period after settlement and before the dwelling is legally able to be occupied and available for rent, the land did not have a substantial and permanent structure in use or available for use. You were also not carrying on a business of the kind covered by subsection 26-102(2) of the ITAA 1997. Accordingly, section 26-102 of the ITAA 1997 applies to deny a deduction for interest to the extent it is attributable to the portion of the borrowing used to acquire and hold the vacant land during that period. | Detailed Reasoning - Question 2: Can you claim a deduction for interest expenses on funds borrowed for the construction of an investment property? | Summary: Interest is deductible to the extent the borrowed funds are applied to construction of the investment property and the interest is incurred with the objective of deriving assessable rental income. Section 26-102 of the ITAA 1997 does not deny this construction related interest because interest (and borrowing costs) to the extent associated with construction is not treated as a loss or outgoing relating to holding land. | Detailed Reasoning - Detailed reasoning: Paragraph 6 of Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities explains that the deductibility of interest is typically determined by examining the purpose of the borrowing and the use to which the borrowed funds are put. Paragraph 9 of TR 2004/4 further states that interest incurred before assessable income is derived will still be incurred in gaining or producing that income where it is not incurred too soon or as a preliminary/prelude to income earning activities, is not private or domestic, the pre-income period is not so long that the necessary connection is lost, the interest is incurred with one end in view (the derivation of assessable income), and continuing efforts are undertaken in pursuit of that end. Section 26-102 of the ITAA 1997 limits deductions for losses or outgoings relating to holding land where there is no substantial and permanent structure in use or available for use. Paragraph 26 of TR 2023/3 states that, in the context of section 26-102 of the ITAA 1997, the Commissioner does not consider construction costs (or interest and borrowing costs to the extent associated with construction) to be losses or outgoings relating to holding land. Paragraph 27 of TR 2023/3 (Example 6) illustrates this distinction by recognising that while interest relating to acquiring the land may be denied until the dwelling is lawfully able to be occupied and leased/available for lease, interest on a construction loan (if otherwise deductible) is not prevented from deduction by section 26-102 of the ITAA 1997. Accordingly, section 26-102 of the ITAA 1997 does not deny a deduction for interest to the extent it is attributable to construction expenditure, and the task becomes identifying the construction related portion of the borrowings (and associated interest) consistently with the purpose/use approach described in TR 2004/4. | Detailed Reasoning - Application to your circumstances: You borrowed under a combined land and construction facility and progressively drew down amounts that were applied to construction progress payments. Interest was incurred as the loan balance increased with those construction drawdowns. The interest attributable to the construction drawdowns is incurred with the end in view of deriving assessable rental income and is supported by continuing steps to make the property available for rent upon completion. Interest is not treated as a holding land cost for section 26-102 of the ITAA 1997 purposes to the extent it is associated with construction expenditure. Section 26-102 of the ITAA 1997 therefore, does not deny a deduction for the construction related portion. | Detailed Reasoning - Question 3: Are your expenses such as council rates, water rates, electricity and gas bills incurred during the construction of an investment property deductible? | Summary: Section 26-102 of the ITAA 1997 limits deductions for losses or outgoings relating to holding land where there is no substantial and permanent structure in use or available for use. For newly constructed residential premises, subsection 26-102(4) of the ITAA 1997 treats the premises as not being a substantial and permanent structure unless they are lawfully able to be occupied and are leased or available for lease. | Detailed Reasoning - Reasons for decision: Subsection 26-102(1) of the ITAA 1997 limits deductions for losses or outgoings relating to holding land where there is no substantial and permanent structure in use or available for use on the land. Subsection 26-102(4) provides that newly constructed (or substantially renovated) residential premises are treated as not being a substantial and permanent structure unless the premises are lawfully able to be occupied and are leased or available for lease. TR 2023/3 at paragraphs 20-22 confirms this requirement applies throughout the period you hold the land. Paragraph 24 of TR 2023/3 states that holding land costs include, among other things, council rates (and other holding/maintenance type costs). Accordingly, expenses such as council rates and similar outgoings incurred while the premises are disregarded under subsection 26-102(4) are holding costs to which section 26-102 of the ITAA 1997 applies. Paragraph 23 of TR 2023/3 (Example 5) demonstrates that the section 26-102 of the ITAA 1997 limitation stops once the dwelling is lawfully occupiable and leased or available for lease, consistent with subsection 26-102(4) of the ITAA 1997. The example is set out below: Harry purchases vacant land on 1 July 2019 and builds a house on the land. He obtains an occupancy certificate on 9 February 2020. Harry lists the property with a real estate agent for lease on 1 March 2020. Any holding costs that Harry 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. | Detailed Reasoning - Application to your circumstances: You incurred council rates and water charges during construction. These are holding costs of the type described in paragraph 24 of TR 2023/3 and are therefore not deductible while the residential premises are treated as vacant land under subsection 26-102(4) of the ITAA 1997, that is, until the dwelling is lawfully able to be occupied and leased or genuinely available for lease. You also incurred electricity charges during construction. To the extent the electricity charges are properly characterised as holding/maintenance type outgoings incurred while the premises are treated as vacant land under subsection 26-102(4) of the ITAA 1997, they are likewise not deductible in that period. You did not establish a gas account during construction and therefore did not incur gas charges in that period. | Detailed Reasoning - Question 4: Are your expenses such as council rates, water rates, electricity and gas bills incurred during the construction of an investment property added to the cost base? | Summary: Where deductions for vacant land holding costs are denied by section 26-102 of the ITAA 1997, those denied costs may be included in the CGT cost base under the third element ("costs of owning") in subsection 110-25(4) of the ITAA 1997, provided they have not been deducted and cannot be deducted (and are otherwise within Division 110 of the ITAA 1997). | Detailed Reasoning - Reasons for decision: Division 110 of the ITAA 1997 sets out the five elements of a CGT asset's cost base. Subsection 110-25(4) of the ITAA 1997 provides that the third element of a CGT asset's cost base is the costs of owning the asset (for assets acquired after 20 August 1991) and includes interest on money borrowed to acquire the asset and rates or land tax where the asset is land. Section 110-45 of the ITAA 1997 provides that expenditure does not form part of the cost base (including the second and third elements) to the extent you have deducted or can deduct it. Paragraph 24 of TR 2023/3 states that subsection 26-102(1) clarifies that interest or ongoing borrowing costs to acquire land are included as holding land costs and gives examples of other holding costs such as council rates, land tax and maintenance costs. Paragraph 25 of TR 2023/3 states that where section 26-102 of the ITAA 1997 prevents a deduction for holding costs, the expenses may form part of the third element costs of owning the asset. The TR 2023/3 Compendium supports the subject to Division 110 qualification by noting that the cost base rules in Division 110 apply to determine whether costs denied by section 26-102 of the ITAA 1997 may be included in the cost base (including reduced cost base considerations where relevant). Accordingly, non-deductible holding costs denied under section 26-102 of the ITAA 1997 may be included in the third element of cost base under subsection 110-25(4) of the ITAA 1997, but only to the extent they are not deductible and cannot be deducted (and are not otherwise excluded by Division 110 of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: You incurred costs in holding the land and during construction, including land acquisition interest and holding outgoings such as council rates and water charges. These are the types of holding costs described in paragraph 24 of TR 2023/3. To the extent those amounts are not deductible because section 26-102 of the ITAA 1997 applies, paragraph 25 of TR 2023/3 supports treating the denied amounts as potentially forming part of the third element (costs of owning) of the CGT cost base under subsection 110-25(4) of the ITAA 1997, subject to Division 110. Inclusion under subsection 110-25(4) of the ITAA 1997 applies only to the extent the amounts are not deductible and cannot be deducted. Amounts that are deductible (or can be deducted) are excluded from cost base by section 110-45 of the ITAA 1997.

Scope and parties: This ruling applies to Person A and Person B (jointly referred to as you). | Property, intention and use: In early MM YYYY, you engaged a property/investment advisory firm. | On DD MM YYYY, you entered a turnkey contract with a builder/developer to buy vacant land (identified lot) in a residential estate in Australia and have a residential dwelling constructed. | You formed and maintained the intention to use the property solely as a long-term residential investment and never for private use. | Contract, settlement and ownership: On DD MM YYYY, you settled the land purchase under the turnkey arrangement. | You hold the property as tenants in common in equal shares. | In MM YYYY, you signed the final construction contract(s) with the builder. | Financing and loan drawdowns: On DD MM YYYY, a financial institution approved a loan facility to fund the land purchase and construction. | On DD MM YYYY, the lender advanced funds to complete the land settlement. | On DD MM YYYY, you directed the lender to release the first construction instalment to the builder. | The lender then made progress payments to the builder as follows: | • DD MM YYYY - milestone 1 | • DD MM YYYY - milestone 2 | • DD MM YYYY - milestone 3 | • DD MM YYYY - milestone 4 | As of DD MM YYYY, your loan balance was $XX. | You expect to make one further progress payment and the final balance on completion. You estimate the total loan amount to be $XX. | You have incurred interest on the loan from settlement onward as the balance increased. | • you commenced construction | • the concrete slab was laid. | The builder estimated completion around DD MM YYYY / DD MM YYYY. | You intend to make the property available for rent immediately on handover. | Holding costs and utilities during construction: You have incurred and paid the following utilities related to the construction of the property | You have not established a gas account during construction. | You are solely responsible for coordinating, maintaining, and paying for utilities during construction.