Private ruling: Rental property expenses
Date of advice: 14 March 2016
Published: May 2016
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to claim a deduction for interest, council rates and water rates in respect of your rental property, prior to the property being tenanted? | A1: Yes

Relevant facts and circumstances: You purchased a rental property in the relevant financial year. The property required substantial repairs before it could be made available for rent. During the period the repairs were undertaken you incurred expenses in relation to the property, namely interest, council rates and water rates. The repairs were completed and the property tenanted in the subsequent financial year.

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 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. It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 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 (Steele's Case) 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 principle extends to other types of expenditure including local council, water and sewage rates, land taxes and emergency services levies. Your expenses are incurred with regard to a property that has been used and is to be used solely for income producing purposes. The expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity. There is no private or domestic purpose for holding the property, your intention was always to advertise for a tenant once the repairs were completed, and a tenant was found to occupy the property several months later. The length of time between the completion of the repairs and the obtaining of a tenant is not considered to be so long that the necessary connection between the outgoings and the assessable income is lost. You undertook fairly substantial repairs over a period less than 12 months. In these circumstances, you are entitled to a deduction for your expenses of interest, local council rates and water rates in the relevant financial year.