Interest deduction on vacant land

Are you entitled to a deduction for interest on a loan, taken out to purchase a vacant block of land held for future income producing purposes?

Taxpayer is about to purchase a vacant block of land.

They will borrow an amount to fund the purchase.

Construction of a house will begin on the land as soon as council approval is received.

As soon as the property is completed the property will be available for rent.

It has always been your intention to have the land and house as a rental property for income producing purposes.

 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’s Case, the High Court considered the deductibility of interest expense incurred on borrowings to purchase land intended to be developed for income production. Taxation Ruling TR 2000/17, 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;

· continuing efforts are undertaken in pursuit of that end.

 In this case, the interest expenses on borrowed funds used to acquire land that will be solely used in income producing operations. As your intention throughout is to build an income producing building and there is no private or domestic purpose for holding the property. And the length of time between purchase of the property and commencement of construction is not considered to have been so long that the necessary connection between outgoings and the assessable income is not lost. You would be entitled to a deduction for the interest expense under section 8-1 of the tax act.

 This article has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances please contact our office.

Comments

  1. helen trand says:

    thank you for the information. What would be a “reasonable” amount of time before build, 1 year? 2 years?
    Thanks
    Regards
    Helen

  2. Hi Helen,
    The ATO does not give an actual time frame and the facts of each case would need to be considered. Provided there are no “significant delays” in building, 1 or 2 years could potentially be an acceptable time frame. In order to fully understand your situation we would need to carefully consider your situation in more detail. Please do not hesitate to contact us if you need any more information.

  3. If an existing rental property was demolished so that a new rental property could be built, would the interest on the existing loan and the interest on the construction costs during construction still be tax deductable?
    Thanks in advance
    Brian

  4. Potentially yes, if the property was acquired with the intention of gaining and producing income, then the interest expenses will be tax deductible. The length of time for construction, and the length of time treated as rental property would need to be considered. Please contact our office if you would like us to look into your situation in more detail.

  5. Tim Faulkes says:

    It’s really useful seeing the tax ruling like TR2000/17 being explained in terms that us mere mortals can understand — trying to understand what they’re actually saying is a real headache! Thank you for this. I notice that TR2000/17 has been withdrawn in favour of TR2004/4, but couldn’t understand if this new ruling would change the outcome of this scenario. Is the interest still deductible in light of this new ruling?
    Thanks,
    Tim

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