Private ruling: Investment property loan interest
Published: September 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to claim a deduction for interest on a loan used to purchase a rental property, before building has commenced? | A1: 



Reasons for decision: Summary: Your intent when taking out the loan was to purchase the rental property from plans. The developer has explained the delay to get the project to building stage, and you have left your funding in place to achieve this. Therefore, you are entitled to a deduction for interest on the loan from the time you deposited it with the developer. | Detailed Reasoning - Detailed reasoning: 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. Interest on funds used to purchase a property on which the taxpayer intends to build an income producing asset may be deductible, from the time of the acquisition of the property ( Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139) ( Steele's Case ). It follows from Steele's Case 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. You have incurred interest on a loan used to purchase an investment property. Since your initial deposit, the land to be used to build the investment property has been purchased by the developer, and the equity can be used to secure further funding for construction. The main reason for the delay in commencement of construction was the shortage of funding from lenders due to the Global Financial Crisis. When the land was fully owned by the developer, it was anticipated that construction funding would be secured, and initial project completion was forecast to be by late 2011. Further events have been that other funding was sought for the construction stage, and a new joint venture with a new partner has been entered into. The latest completion date has now been set for late 2012. The period of time between your purchase of the investment property and when it is expected to be available for rent is not considered to be so long that the necessary connection between the interest outgoing and the derivation of income is lost. It is accepted that you are making continuing efforts in pursuit of the construction to be used solely for income producing purposes, as evidenced by the correspondence from the development company to you. Accordingly you are entitled to a deduction for your share of interest expense relating to this property from the time you made the deposit to acquire the property.

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 2009 you invested borrowed funds to purchase an investment property before it was built. | The property is one of a unit development and availability of funding has been affected by the Global Financial Crisis. | There is now a new joint venture with a new partner for construction. | The new expected finishing date of the construction is now late 2012.