Private ruling: Income tax – interest expense
Date of advice: 19 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a deduction for interest expenses you incurred for the construction of the X townhouses? | A1: Yes. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. In your case interest was incurred on a loan that was used to finance the construction of X townhouses that you are currently renting. It was always your intention to rent the townhouses and as they are currently producing assessable income, accordingly you are entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 for the interest that you have incurred while these buildings were under construction.

Relevant facts and circumstances: You owned adjoining residential investment properties in a suburb of a capital city. Each property had one house. You arrange development approval which allowed: ● The relocation of the existing houses to another position on the land, and; ● The building of several townhouses on the remaining land surrounding the houses. It has always been your intention to retain all dwellings for long term rental income purposes. You are not registered for GST and have not claimed any GST credits for the construction. You signed a building contract for the development, and you were able to commence the development when your bank approved the construction loan. In less than 12 months, two consecutive builders you had appointed became insolvent. You were able to engage a third builder and obtained a loan to finance the remainder of the construction of the townhouses. You incurred interest on this loan. You refinanced the loan at the end of the construction of the townhouses. You currently own all the townhouses and they are rented. You do not intend on disposing of any of the townhouses and will retain all of them for long-term rental income.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1