Private ruling: rental expenses
Published: September 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for the interest incurred on a property loan for a property no longer used to produce assessable income? | A1: No. | Q2: Are you entitled to a deduction for interest incurred on a loan to fund repairs and capital improvements for a property no longer used to produce assessable income? | A2: No. | Q3: Are you entitled to a deduction for council rates, water service and wastewater service fees for a property no longer used to produce assessable income? | A3: No.

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. You purchased a property as an investment. The property was either rented or available for rent continually from the date of purchase. You decided you would like to live in this property as your principle residence and the tenants were given notice to vacate. The premises were vacated on a specific date in 2011. At this time the property was in a bad state of repair and needed considerable work to put it back into its original pre-tenanted condition. You chose to do the repair work yourself with the assistance of licensed professionals as required. You also decided to upgrade the kitchen and bathroom. As the property had deteriorated significantly and the repair and upgrade work was done on a part-time basis by you and licensed professionals, it took just over a year for the work to be completed. You were not able to and did not live in the property at any time while the work was in progress. All expenses incurred during this period have been divided between deductible repairs and capital improvements. The deductible repairs have been claimed on your 2011 income tax return. The capital improvements will be included to increase the cost base of the property. While the work was being completed, you continued to pay interest on your property loan. You incurred interest on the property loan of $X, council rates of $X and wastewater service fees of $X You contend you should be able to claim the outlined costs as a deduction in addition to the repairs. An additional loan was taken out to fund the repairs and improvements. You contend that the interest on the portion of the loan relating to the repairs may be claimed from the time of the loan drawdown until the work was complete and you were able to move into the property as your principal place of residence.

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 (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, or relate to the earning of exempt income. Council rates and water service fees incurred by the owner of a rental property are deductible where the property is either income producing or is available to rent. In your case, the expenditure for council rates and water service fees was incurred at a point when your rental property was not producing income or available to rent. A deduction under section 8-1 of the ITAA 1997 for council rates or water service fees is not allowable as the expenditure is not deemed to have been incurred in earning assessable income. | Detailed Reasoning - Interest expenses: Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. To determine whether the associated interest expenses are deductible under section 8-1 of the ITAA 1997, TR 95/25 specifies that it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in FC of T v Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. The interest incurred will be deductible to the extent that the property is used to produce assessable income. In your case, your rental property was used to produce assessable income up until a specific date in 2011. After the tenants vacated, you incurred expenditure for interest on a loan for the property and on a loan to fund repairs to the property. When these expenses were incurred, you were no longer using the property to produce assessable income. Therefore, you are not entitled to a deduction for interest under section 8-1 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.