Private ruling: Deductions for land and construction of a rental property
Published: April 2018
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 01 July 2015

Ruling: Q1: Is the taxpayer entitled to claim a deduction for the interest expenses incurred to construct the rental property? | A1: Yes | Q2: Is the taxpayer entitled to claim a deduction for the borrowing expenses incurred to purchase and construct the rental property? | A2: Yes | Q3: Is the taxpayer entitled to claim a deduction for the following expenses: Management fee, Rental Guarantee, Depreciation report, Gardening and Maintenance, Tenancy costs training and Photographs? | A3: Yes | Q4: Is the taxpayer entitled to claim a deduction for unidentified capital expense in the development fee? | A4: No

Relevant facts and circumstances: You purchased a vacant land and house package in late 2015. You entered into a loan to purchase the package. You intended to lease the property once it had been built. This was your purpose for investing in the land and house package. You entered into a development management agreement in late 2015. The agreement covered charges for Depreciation Report, Rental Guarantee, Gardening and maintenance, Tenancy costs & photographs and an amount that is unidentified. You made progress payments on the land that were finalised in mid-late 2016. You made progress payments on the house build that were finalised in mid-2017. You entered into an agency agreement to lease and manage the property in mid-late 2017. The property was first leased in mid-late 2017.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) section 8-1 | Income Tax Assessment Act 1997 (ITAA 1997) section 25-25

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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. Section 25-25 of the ITAA 1997 allows a deduction for certain borrowing expenses. Where the total borrowing costs exceed $100, the claim must be apportioned over the period of the loan or five years, whichever is the lesser. The borrowing expenses are incurred with regard to the purchase of land and the construction of a house that will be used solely for income producing purposes. The borrowing expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity. Borrowing expenses such as procuration fees, legal expenses, stamp duty on the mortgage, valuation and survey fees associated with the borrowing are deductible to the extent that the borrowed monies are actually or intended to be used during the income year for income producing purposes. The fees the taxpayer has incurred in relation to the management agreement were paid in order to obtain a suitable tenant for the investment property once the property was constructed and available for rent. It was always the taxpayer's intention to derive assessable rental income once the property had been completed. The expenses are incurred with regard to property to be used solely for income producing purposes. The expenses are not considered to have been incurred at a point 'too soon' before the commencement of the income producing activity. There is no private or domestic purpose for holding the property, the taxpayer's intention was always to build an income producing property. There was an expense that has not been identified and has been presumed to be a capital expense in nature therefore a claim under Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) cannot be allowed.