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

Ruling: Q1: Are you entitled to claim a deduction for the interest incurred on your investment loan for the period you no longer intended it to be available for rent? | A1: No

Relevant facts and circumstances: You had an investment property that was used to generate rental income. The property was never used for private purposes. You stated that you could not see yourself making money on the investment and therefore you decided to sell. The tenant moved out on during the 2011-12 financial year as you needed to make some repairs to the property and would be showing prospective buyers through the property. Approximately two weeks after the tenant moved out you instructed your agent not to keep looking for another tenant as you wanted the house empty and did not want the property subject to a lease. You engaged a builder to perform some warranty repairs. You incurred some expenditure to cover and paint some cracks in the wall and on garden maintenance. Settlement of the property occurred later in the 2011-12 financial year. Your have lodged your income tax return for the 2011-12 financial year. You did not include the two payments for repairs (discussed above) or interest incurred on your investment loan for the period from when you no longer intended to rent the property until the date the property was sold.

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

Reasons for decision: Detailed Reasoning - Detailed reasoning: 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. You may claim a deduction for certain expenses (council rates, certain repairs and maintenance and, interest on loans) that you incur for your rental property. However, the property must be rented, or available for rent, for the income year in which you claim a deduction. In order to claim a deduction for rental property expenses in situations where no assessable income has been derived from the property, you must be able to show that continuing efforts are being undertaken to ensure that the property returns to deriving assessable income. In cases where you intention changes, for example, you decide to use the property for private purposes and you no longer intend to use the property to produce rent or other income, you cannot claim the expenses after you intention changes. In your case, you made a decision to sell the property. It was at this time that your intention changed from that of using the property to earn assessable income. Accordingly, you cannot claim a deduction for the interest incurred on your investment loan after this date as any expenses incurred after this date will be considered of a capital or private nature.

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