Private ruling: Interest deduction
Published: July 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you eligible to claim the interest on a loan used to purchase a rental property before the property is built? | A1: Yes.

Relevant facts and circumstances: You borrowed to purchase a unit off the plan in an apartment complex which is expected to be completed in approximately 12 months time. You have placed a 10% deposit from the loan, and will be drawing down on the loan progressively as each stage of the building is completed. You are the sole owner on the property title deed. On completion, the property will immediately be available for rent, and will be managed by an agent.

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. Interest on funds used to purchase a property on which the taxpayer intends to build an income producing asset may be deductible, from the time of the acquisition of the property ( Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139) ( Steele's Case ). 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 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. You have incurred interest on a loan used to purchase an investment property. Project completion is forecast to be in 2013. The period of time between your purchase of the investment property and the settlement period is not considered to be so long that the necessary connection between the interest outgoing and the derivation of income is lost. It is accepted that you will make continuing efforts in pursuit of the construction to be used solely for income producing purposes, as it is your intent to draw down on the loan progressively as construction proceeds. Accordingly you are entitled to a deduction for the interest expense relating to this property. As stated in Steele's Case , the interest on funds used to purchase a property on which the taxpayer intends to build an income producing asset may be deductible, from the time of the acquisition of the property.

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