Private ruling: Rental property deductions
Published: September 2013
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for 100% of the interest and holding costs incurred in relation to an investment property? | A1: No. | Q2: Are you entitled to a deduction for a portion of the interest and holding costs incurred in relation to an investment property? | A2: Yes, refer to reasons for decision.

Relevant facts and circumstances: You and your spouse purchased a property with the intention of renting it under a government scheme. The land was purchased and settled in the 2011-12 financial year. You and your spouse then purchased the house from a builder and made progress payments on a mortgage during construction. The property became available for rent in the 2012-13 financial year. The property is rented below market value as required by the government. The property is being managed by a real estate agent. The annual statement discloses the State Government incentive as well as the incentive calculation for the tax offset for the Commonwealth incentive amount. You have incurred expenses in respect of the rental property, including insurance, rates, borrowing costs and loan interest, both before and after the property was available for rent.


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. It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 ( Steele's case ) 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 where: · 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. | Detailed Reasoning - Application to your circumstances: In your case you purchased land, with an intention to build an income producing property and rent it under the government scheme. As construction was completed within X months and the property was then used to produce income, the necessary connection between the interest expenses and rental income still existed. There is no private or domestic purpose for holding the property. However it is important to note that the interest and holding costs were not incurred with a single end view to produce assessable income. They were incurred with a view to produce assessable income and NANE income. Subsection 8-1(2) of the ITAA 1997 states you cannot deduct a loss where the outgoings are of a capital, private or domestic nature, or incurred in producing NANE income. It is generally accepted that expenses incurred in respect of a rental property are considered to be incurred in the course of gaining or producing assessable income and are therefore deductible. Apportionment of expenditure is necessary where it serves both an assessable income producing end and some other end: ( Ronpibon Tin NL v FC of T (1949) 8 ATD 431). While derivation of assessable income by way of rent is one objective achieved by participation in the government scheme, the receipt of government incentives, including state government NANE income is another. The costs associated with making your property available as a rental property would need to be apportioned to reflect the derivation of associated assessable income and NANE income. | Detailed Reasoning - Application to your circumstances: In this case, the interest and holding costs were incurred with a view to produce assessable income and NANE income. Although you were unaware of the date the property would begin producing income, it was the intention from the outset that the property would be rented in line with the government requirements. Therefore, you are only entitled to a deduction for a portion of the expenses incurred both before and after the property was available for rent.