Private ruling: Rental property interest
Published: June 2013
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to claim a deduction for the interest expenses during the period your rental property is unable to be tenanted as it is being renovated? | A1: Yes.


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 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. The principles in relation to the deductibility of expenses incurred in gaining or producing assessable income have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals. It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (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. Taxation Ruling TR 2004/4, in considering the above decision, 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 this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future. In your case, you own a rental property which was rented out until late 200Y, when you undertook renovations of the property. The delay in returning the property to the rental market has mainly been due to damage occurring to the earlier completed renovations caused by the roof leaking. However, as soon as the work is completed, you intend to put the property back on the rental market at an increased rental amount. The period of time between the commencement of the renovations and returning the property to the rental market is not considered to have been so long that the necessary connection between the interest outgoing and the derivation of income has been lost. Therefore, you are entitled to a deduction for the interest expense relating to this property.

Relevant facts: You have owned a rental property since 200X, which has been rented until late 200Y. | It has since been empty while renovations have been made. | The renovations commenced as soon as the tenants vacated the property. | While the renovations were being completed further damage was detected. | This damage was mainly caused by the roof leaking. | There had been earlier patch up work done to the roof prior to you owning the property that had not been previously noticed. | This damage to the roof had caused it to leak into the ceiling, soaking into insulation and bowing timber, rafters and plaster. | The earlier renovations have now been damaged by the problem with the roof and will be needed to be completed again. | Due to the increase in rainfall during this time there have been issues with movement and cracking of plaster, doors, damage to decking and side fence. | All the extra damage and cost involved has meant the property has been out of the rental market for longer than originally anticipated. | Also during this time there has also been a personal issue with a close relative that has required a lot of travelling and time away, which has also added to the additional time needed to finish the renovations. | Once all the renovations are completed your intention is to put the property back on the rental market at an increased rental amount. | You hope to have the renovations completed by the end of the current calendar year.