Private ruling: Rental property deductions
Published: June 2013
Ruling period: Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for holding costs for your rental property during a period in which no income was derived? | A1: Yes.

Relevant facts and circumstances: You own a property in a strata-titled. The rental property has been rented since acquisition in 200X. During the relevant year, a water leak in the property above yours damaged your rental property, rendering it uninhabitable. The water leak was not of your making and not in your sole power to fix. Multiple third parties were involved in getting the water leak fixed. The water leak took approximately Y months to fix due to the fact that many parties were involved. You could not conduct repairs to your rental property until the water leak had been fixed; consequently, the rental property was uninhabitable for the entire Y month period it took to fix the water leak. The rental property was not tenanted nor advertised for rent during until the water leak was fixed. During the period the rental property was uninhabitable, you continued to incur holding costs including interest, rates, body corporate fees insurance and depreciation. Within two to three weeks of the water leak being fixed, the rental property was repaired and re-let.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act (ITAA) 1997 allows a deduction for any losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed under section 8-1 of the ITAA 1997 for expenses to the extent to which they are of a capital, private or domestic nature. In this case interest and other holding costs have been incurred in respect of a rental property which was uninhabitable for a period during which no assessable income was produced. The property had been rented prior to, and within a reasonable time after the property became inhabitable again. The principals relating to the deductibility of interest prior to using an asset to earn income was considered by the High Court in Steele v FC of T 99 ATC 4242 (1999) 41 ATR 139. The implications of this case are considered in Taxation Ruling 2004/4 paragraph 9. It follows from Steele 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 the following circumstances: · 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 this case the interest incurred is not preliminary or of a private or domestic nature. The period of interest outgoings is not too long as to lose the necessary connection between the outgoing and assessable income and the interest is incurred with the view of gaining or producing assessable income. Continuing efforts were made in pursuit of that end. The same reasoning would apply to other costs incurred in holding the property including rates, body corporate fees, insurance and depreciation. Therefore, the expenses of holding the property, including interest, are an allowable deduction under section 8-1 of the ITAA 1997 during the period the property was uninhabitable.