Private ruling: Vacant land held for income producing purposes
Published: March 2014
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for holding costs (loan interest and council rates) incurred on vacant land purchased with the intention of building an income-producing property for the year ended 30 June 20XX? | A1: Yes. | Q2: Is the amount you receive for agistment assessable income? | A2: Yes. | Q3: Where you have expenses that are directly attributable to the amount of the agistment income received are you entitled to claim deductions up to the amount of the agistment income received? | A3: Yes?

Relevant facts and circumstances: In the first half of 20XX you purchased an interstate parcel of land which is zoned 'rural residential'. You intend to build income producing dwellings on the land. You have received an in-principle finance approval. Soil testing has been completed and you are currently in the process of having plans drawn-up to build a storage shed on the vacant land to enable the construction of the dwellings. To see if it was cost effective to have the dwellings built in the town you purchased the land, you approached a builder for a quote in late 20XX. You have decided not to pursue this option. Instead you have decided to have the dwellings pre-fabricated in the state you live. You will send them by road transport to the worksite as this is a more viable option. You have had plans drawn-up for the dwellings and are in the process of having engineering plans completed. When the engineering plans have been completed, you will apply for a building permit. You intend to commence building in the second half of 20YY and complete the project by late 20ZZ. You receive a weekly amount for the agistment of animals on the property. You have incurred holding costs (interest and council rates) for the property. You have incurred costs for traveling to inspect the land and general maintenance.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(1) | 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. In Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139, the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. In considering the above decision Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities , 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 sewage rates, land taxes and emergency services levies. Your efforts to pursue your goal of constructing income producing dwellings includes, obtaining an in-principle approval for finance, consulting with engineers and architects to have plans drawn-up, conducting soil tests and obtaining building quotes. When the plans are completed you will apply for a building permit. The accommodation facility will be available upon completion. In your circumstances the holding costs are not considered to have been preliminary or incurred at a point too soon before the commencement of the income producing activity and the length of time between the purchase of the land and the commencement of construction is not so long that the necessary connection between the holding costs and the assessable income is lost. You are entitled to a deduction for the holding costs under section 8-1 of the ITAA 1997. | Detailed Reasoning - Income: Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. The agistment income you are receiving is considered to be ordinary income and is assessable. Deductions may be claimed against this agistment income up to the amount of the income received where the expenses directly relate to the receipt of the agistment income. For example if you incur costs to maintain fencing to keep the animals in your property this would be an expense that would be directly attributable to the receipt of the agistment income. If there are no directly attributable expense there would be no further deductions available in excess of the holding costs which have already been allowed. Travel to inspect the land would not generally be considered to be an expense either as a holding cost or an expense directly attributable to receipt of the agistment income.