Private ruling: Rental property deductions – interest and rates on vacant land
Date of advice: 4 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for interest, rates and other holding expenses relating to a vacant block of land? | A1: Yes

Relevant facts and circumstances: You purchased a block of land in the 2016 income year with the intention of building a rental property on it. You intend on building a house on the land in 2019. Since purchasing the land you have spoken to over 40 builders to discuss the best type of house to build. You have inspected over 70 display homes trying to establish the best house to build. You are not able to build an off the shelf house and careful consideration is required in relation to the type of house that is built. You have engaged an architect along with a builder in relation to this project. You have now engaged a builder and have the finance to build the house. You intend to have the house completed during July-September 2019. The property will be placed in the hands of a real estate agent as soon as it is completed. One side of the land has been fenced.

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 (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. | Detailed Reasoning - Prior to the sale of Property B: 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 considers the decision in Steele v Deputy Commissioner of Taxation (1999) 197 CLR459 ( Steele’s case ) and 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, and ● continuing efforts are undertaken in pursuit of that end. While Steele’s case deals with the issue of interest, the principles can be applied to other types of expenditure including local council, water and sewerage rates. TR 2004/4, in considering the final of the above conditions, states that a test of 'continuing efforts' would need to be set within the context of the normal time frames of the relevant industry. However, if a venture becomes truly dormant and the holding of the asset is passive, relevant interest will not be deductible even if there is an intention to revive that venture sometime in the future. In your case you have been making continuous efforts in relation to the building of the rental property since you purch ased the land. You have liaised with more than 40 builders to ensure the right house is built for the block and over 70 display homes have been viewed by you. An off the shelf house cannot be built on the block. You have now engaged an architect and builder and intend to have the house completed by July-September 2019. The property will be placed in the hands of a real estate agent as soon as it is completed and you will commence deriving income from it. You are able to claim the interest, rates and other holding expenses as a deduction under section 8-1 of the ITAA 1997.