Private ruling: Rental - deductions - expenses after property condemned
Published: December 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: The scheme has commenced.

Ruling: Q1: Are you entitled to a deduction for rental property expenses incurred after the property was condemned? | A1: Yes.

Relevant facts and circumstances: You own a rental property from which you have earned assessable income. The property suffered damage as a result of a weather phenomenon, and was condemned making it uninhabitable. You lodged an insurance claim however it was rejected. You are seeking legal advice in relation to the insurance claim and the insurer's decision not to pay the claim. If you are able to recover insurance proceeds you intend on demolishing and rebuilding the building, and continue to use it as a rental property. It is unlikely that you will have the financial capacity to commence demolition and rebuilding in the near future without the insurance proceeds. It is unlikely that you will demolish the building whilst fighting the insurer for fear of losing evidence in the case against the insurer. Your intention was to continue to use the property as a rental property indefinitely had the damage not occurred. You are still incurring bank interest, rates and other holding expenses relating to the rental property. You do not have the ability to pay out the rental property loan.

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. Taxation Ruling TR 2004/4 examines the deductibility of interest after the cessation of the income earning activities. You may still be entitled to a deduction for recurrent interest expenses incurred after the cessation of your previous income earning activity. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period. However, the nexus between the interest expense and the relevant income earning activities will be broken where: • you have the ability to repay the loan but choose not to, or • you make a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt. The nexus between the expenses and the relevant income earning activities has not been broken, as you do not have the ability to repay the loan and it is not a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities. Therefore the expenses relating to the rental property will continue to be deductible after the property has been condemned. Whilst you have decided to delay the demolishing of the building until an outcome of the legal action is determined, it will not impact on the deductibility of the expenses provide the above nexus isn't broken.