Private ruling: Deductibility of interest expenses
Published: August 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Can you claim a deduction for the interest expenses incurred on borrowings you took out to fund the construction of a dwelling that you intended to rent out but instead sold on completion? | A1: Yes.


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

Reasons for decision: Detailed Reasoning - Rental property interest deduction: Section 8-1 of the Income Tax Assessment Act 1997 provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature. In Steele v. FC of T (1999) 197 CLR 459, 99 ATC 4242, (1999) 41 ATR 139, 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 circumstances where the following factors are met: · 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. In your case, you and your spouse acquired the property to rent out the property that was currently there. You intended to increase your rental portfolio by build another dwelling on the property to rent out. The interest expenses were incurred on funds borrowed to construct the second dwelling. The delay in the construction of the property arose through no fault of your own but is rather due to the delays in the planning process of getting approval which took a period of X years. Due to the increasing costs caused by the delays you had to sell the dwelling rather than rent it out. You meet the criteria set out in TR 2004/4, therefore you are entitled to claim the interest deduction in relation to the construction of the dwelling that was to be rented out. You can claim a deduction for your share of the interest expenses.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You purchased a rental property a some years ago and have rented it to tenants since then. | To expand your portfolio, you used the back yard to build a second dwelling so that you could rent that too. However, the planning process took well over X years (through no fault of yours), severely delaying construction. By law, planning applications should be decided within 60 days. Your building cost estimate was much lower than the final costs. The project took over X years to complete and this has significantly reduced your expected income. | You borrowed funds in the 2010-11 financial year to construct the second dwelling. | Given the loss of anticipated income and the blow out of building costs you were forced to sell the property immediately after completion. The sale is being treated under the capital gains tax legislation for income tax purposes. | After assessing the expected rental income from the second dwelling you found that it was definitely not feasible for you to keep it as an investment. You have sold the second dwelling (pending on approval of subdivision) but are continuing to rent out the original property.