Private ruling: Expenses prior to renting
Published: November 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: A1: No


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 43-10 | Income Tax Assessment Act 1997 Section 40-25

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. Taxation Ruling 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 Steele's case , the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. 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 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. In your case the cost of the mortgage interest, council and water rates, electricity, gas and insurance expenses were incurred at a point too soon to be incidental and relevant to the income earning activity from this property during the 2011-12 financial year. Whilst you had determined that the property was to be rented, the property was not yet available for rent during this period. The expenses are also private and domestic in nature. Accordingly, no deduction is allowable, prior to your property being made available for rent. A deduction for capital works and depreciation is allowable once the property is income producing.

Subject: Expenses prior to renting: Are you entitled to a deduction for holding costs prior to your property being made available for rent? | Relevant facts: During the 2011-12 financial year you were hospitalised and unable to work. | You formed the view that you would not be able to return to your home and determined that you would need to renovate and avail the property for the rental market. | When not hospitalised you lived with your parents. You commenced progressively preparing the house. | The removal of possessions, furniture, painting, landscaping, coordinating capital works and other maintenance work was completed in June and July 2012. | Due to further illness throughout 2012, the property was delayed and tenants were unable to move in until January 2013. | You incurred holding costs in regard to mortgage interest, council and water rates, electricity, gas, insurance, capital works and depreciation.