Private ruling: Interest expense for property loan
Published: June 2012
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2008

Ruling: Q1: Can you claim a deduction for the loan interest, rates and other holding costs on your vacant block of land? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You and your spouse jointly purchased vacant land in mid 2008, with the intention of building a rental property. The purchase of the land was financed through a variable rate investment loan. After the birth of a child, one spouse took time off work commencing after 30 June 2008, and you had insufficient funds to start construction of the rental property, and would have needed to borrow further financing. Without the income of the spouse you were unable to borrow at that time. The spouse returned to work in after 1 January 2010, and shortly after you started to make enquiries with builders. After selecting a builder, you travelled to the property locality to meet with them, had house plans prepared, and accepted their formal quote in 2010. You then applied for a bank loan with the assistance of your mortgage broker and in 2010 your bank declined your application. You did not have sufficient funds to meet the funding shortfall, and following discussions with your mortgage broker decided to complete a renovation you had already commenced on your main residence, which would enable you to realise the best valuation for it. You would then use the added equity in your main residence to fund the construction of the rental property. Because you are still living in your home, the renovation is being done in stages, with an expected completion by the end of 2012. Once the renovation to your main residence is completed you plan to have it valued and reapply to the bank to fund the construction of your rental property, using the equity available. It is still your intention to proceed with construction of a dwelling on your vacant land as soon as your financial circumstances permit.

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) provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature. Expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction. Taxation Ruling TR 2004/4 (TR 2004/4 ) considers deductions for interest incurred prior to the commencement of income earning activities and the implications of the decision of the High Court in Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 ( Steele's case ). In Steeles case, the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. TR 2004/4 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, land taxes and mowing. However, in Temelli v. FC of T 97 ATC 4716; (1997) 36 ATR 417 ( Temellis case ), it was found that the temporal hiatus left open the possibility of some purpose other than gaining or producing assessable income to such an extent that the required nexus did not exist. The interest did not have a sufficient connection with the prospective income producing activity of rental of the proposed residence. The taxpayers did not have the requisite degree of commitment to the income producing activity or the income producing element of the project. Through to the end of the year of income, the issue was whether, and if so when, a residence would be built for income earning purposes. You purchased the block of land in mid 2008. From mid 2008, apart from the house plan and loan application in 2010, your circumstances are similar to those of Temellis case in that no steps have been taken to advance the intention of building the rental property and you have not shown that continuing efforts have been undertaken. If your home renovations are completed by the end of 2012, construction of a dwelling on your land would not commence until 2013 at the earliest, four and a half years after the purchase of your land. Taking into account the period of time since purchase of the land and that you have not yet undertaken activities to progress the building of a rental property, it is considered that you have not undertaken continuing efforts in pursuit of gaining or producing assessable income and the necessary connection between the outgoings and the assessable income has been lost. Therefore, you are not entitled to claim a deduction for interest or holding expenses relating to the land.

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.