Private ruling: Development interest expenses
Published: November 2013
Ruling period: Income year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for the 'development interest' incurred under section 8-1 of the Income Tax Assessment Act 1997 ? | A1: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: · the application for private ruling · all attachments and annexure to the application. The Taxpayers are the joint owners of a property which is leased to a third party. In the interests of maximising its business returns, the tenant approached the Taxpayers with a proposal to develop the property. The development would essentially involve the demolition of the existing premises and construction of new premises. The development proposal was accepted by the Taxpayers. Consequently a new "Agreement for Lease" (AFL) was signed which governed how the development arrangements would proceed. The financial arrangements for the development involved a loan that would have interest capitalised during the construction period - this capitalised interest is referred to as 'development interest'. Once the development works are completed, the Taxpayers are required to pay interest on the outstanding loan amount and repay the loan over a fixed time period.

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 you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put. Where a borrowing is used to acquire, or acquire a further share, in an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income: Taxation Ruling TR 95/25. The capitalising of interest is simply considered as being the method by which you meet interest expenses which you have incurred. That is, by obtaining or increasing a borrowing to fund the expense and may commonly be seen practically, for example, in overdraft facilities. In your situation, it is accepted the development interest is referable to the construction costs of the new commercial premises. You continue to derive lease income from the tenant of this property during and after the construction and the interest is therefore incurred in the production of your assessable income. Accordingly you are entitled to a deduction for the development interest incurred.