Private ruling: Deduction for interest expenses on a loan prior to derivation of rental income
Published: February 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2010 | Year ended 30 June 2009 | Year ended 30 June 2008
Date scheme commenced: 1 July 2007

Ruling: Q1: Are you able to claim a deduction for interest expenses incurred on a loan to purchase land on which you intended building rental properties, prior to the derivation of assessable rental income from that property, until your intention changed to build your main residence on the land? Yes.


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 losses or outgoings incurred in gaining assessable income provided they are not capital, private or domestic in nature. Taxation Ruling TR 2000/17, in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139, concludes that the 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'; that is, it 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, being the gaining or producing of assessable income; and Continuing efforts are undertaken in pursuit of that end. Your property was purchased with the intention to derive rental income. You actively took steps toward constructing dwellings on the property and incurred expenses in doing so. Interest is incurred with the view to derive assessable income. Therefore, the interest incurred on the property is deductible. The interest you claimed significantly increased from 2008-09 to 2009-10. You have advised that this was because you increased your loan with the intention of purchasing another property but ended up using a large part of the loan to pay down a loan on property B. As the purpose of the extra funds on your loan was not related to property A, you cannot claim that portion of interest for the 2009-10 year of income against Property A - the interest may be deductible against property B.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: In mid 2007 you entered into a contract to purchase property A with settlement in late 2007. | You intended building two separate houses on the land with a view to renting them out. | You experienced delays gaining access to easement to drain stormwater which did not finalise until mid 2008. | You were unable to submit a development application until the easement was finally granted. | You submitted development applications and incurred architect fees. | You entered into negotiations with builders. | In early 2009 you were going to sign a contract with builders to construct the first of the houses. | At this time the council announced a new housing strategy for the area which would allow you to build townhouses rather than two houses on the land when the rezoning proceeds (which it has not as yet). | In early 2011 you commenced construction of a small dwelling which was completed in mid 2011 and you moved in. | You treat this property as your principal place of residence. | In 2009-10 the interest you claimed in your tax return increased as you increased the loan on property A. | You advised that you increased your loan with the intention of purchasing another property but ended up using over $ of the loan to pay down a loan on property B. This property has a dwelling and has been used as a rental property since you purchased it.