Private ruling: Interest deduction during rental property redevelopment
Published: August 2011
Ruling period: Year ended 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to claim a deduction for your share of the interest on a loan for a rental property when the property is being redeveloped for future income producing purposes? | A1: 


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. You and your spouse borrowed money to purchase a rental property for income producing purposes. Following a long period of continual rental, you then commenced to redevelop the property for the same purpose. The interest incurred on these borrowings is not considered preliminary or to have been incurred too soon as it was incurred on money borrowed for the sole purpose of producing assessable income. From the time you commenced planning and building the new dwellings, the intention throughout was to build income producing buildings and there was no private or domestic purpose for holding the property. Continuing efforts were undertaken in the pursuit of gaining or producing assessable income. The length of time between the vacating of the original rental property, the commencement of construction and the proposed date of the new property becoming available for rent is not considered to be so long that the necessary connection between the interest outgoings and the assessable income is lost. Therefore, you are entitled to a deduction for your share of the interest incurred in relation to the rental property during the period it is being redeveloped.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You are the joint owner of a rental property which you and your spouse have rented out for over 10 years. | The property was tenanted until last year. You commenced building works to redevelop the property a month after the tenant moved out. | You are building two new dwellings for rental on the site. | Your intention is and always has been to continue to use the site for investment purposes by renting out the new dwellings once completed. | The new dwellings are now at lock up stage, and based on progress reports from the builders, you realistically hope to have them available for rent approximately one year after building works started.