Private ruling: Rental expenses
Published: May 2012
Ruling period: Year ending 30 June 2012 | The scheme commenced on | 1 July 2011

Ruling: A1: 

Relevant facts and circumstances: You and your spouse jointly purchased an investment property for the purpose of short term rental. This was financed with a loan in both names. You incurred expenses in relation to the property such as bank interest, rates, land tax, bank fees and insurance payments. The property was vacant for approximately six months during which time you stayed in the property for several weekends to enable you to install new carpets, blinds, furniture and curtains. You required council approval to change the use of the property to short term rental. You submitted the application to approve this change and the change of use was approved approximately three months later. Shortly after approval you advertised that the property was available for rent. The first short term holiday accommodation was let one month later. You and your spouse will occupy the property occasionally during the year. This private usage will be recorded in a diary. The property is managed and advertised locally and is let at commercial rates.

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) provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature. In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's case) , the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. Taxation Ruling TR 2004/4, in considering the above decision, 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 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. While this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future. While Steele's case deals with the issue of interest, the principles can be applied to other types of expenditure including council rates, land tax, bank fees and insurance payments on an income producing property that are ordinarily deductible under section 8-1 of the ITAA 1997. Taxation Ruling IT 2167 discusses letting of a holiday home for only part of the year. Paragraph 23 gives an example of apportioning losses and outgoings attributable to the property on a time basis and allowed a deduction for the proportion that the property was let. In your case, you purchased a property with the intention of letting it for short term commercial rental with some personal use of the property. The delay from the purchase to the first letting of the unit has not been so long that the necessary connection between outgoings and assessable income is lost. Also IT 2167 allows the apportioning of costs between private use and income producing activity of the rental property. Therefore the portion of expenses relating to income producing rental that you have incurred for bank interest, council rates, land tax, bank fees and insurance payments in relation to this property are deductible from the date of purchase.

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. | Subject: Rental expenses: Can you claim a deduction for the income producing portion of expenses incurred from the date of purchase of your investment property?