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Tax deductability when building an IP

Discussion in 'Accounting, Tax & Legal' started by lorrimer, 29th May, 2007.

  1. lorrimer

    lorrimer Well-Known Member

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    Hi,
    I'm thinking about building a investment property.
    I know that the interest on the loan for the vacant land isn't tax deductable.
    However could somebody please tell me at what stage the interest on the loan becomes tax deductable once the building of the house commences.
    Would it be at the commencement of construction or at completion.
    Thanks
     
  2. pjb89

    pjb89 Active Member

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    Hiya

    I am no accountant, but I was under the impression that you can claim the interest on the land loan so long as your intent was to generate an income producing asset. I also recall there was a certain timeframe when this was applicable...but once again the accoutants amoungst us are far better qulaified to answer this....

    Pedro
     
  3. FrankGrimes

    FrankGrimes Well-Known Member

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    The key is income producing at the end. I'm due to start building in August, the interest will be deductible even though there is no tenant. Perfectly above board. I'm using the ITW tax variation form to assist cashflow as well.
     
  4. MattR

    MattR Well-Known Member

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    lorrimer

    I haven't looked at this one in a while, but I would think that there are two things happening here;

    1. You are building an investment property - this is a capital item
    2. You then plan to use that capital item to generate income - rental income

    In the first instance the interest on purchase of land and construction of the property would be a capital cost rather than an expense as there is no assessable income. So this interest would be added to the cost of building and used for capital gains tax purposes on sale of the property some time in the future. If you were a builder/developer and building purely for resale, then that would be different, the interest would form part of your ordinary business expenses and be deductible.

    Secondly, once the property is built and made available for tennants then the interest becomes deductible for you as a landlord. EDIT: From that point the interest that accrues on the loan is deductible, not the previous (building & construction) interest.
     
    Last edited by a moderator: 30th May, 2007
  5. coopranos

    coopranos Well-Known Member

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    Its amazing how many accountants still take the point of view that interest is not deductible during construction phase of a residential property where the intention is to rent the property out.
    See Steele's case and any number of ATO interpretative decisions clearly demonstrating that interest , rates, and borrowing costs are fully deductible on the purchase and construction of a rental property (it must be used to produce an assessable income however, you cant just claim the interest then change your mind and live in it or you will have to reverse your claims).
     
  6. lorrimer

    lorrimer Well-Known Member

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    Thank you all for your input on this one.
    There seems to be some conflicting opinions, so maybe the answer isn't as straight forward as I thought it would be.
    Coopranos, in your opinion would the interest on the loan for the land before construction begins, be deductable.
    I would be very grateful if you could point me in the direction of a link to the Steele ruling that I could provide for my accountant if needed.
     
  7. coopranos

    coopranos Well-Known Member

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    It shouldnt be up to you to do the running around finding cases for your accountant, however a simple search of the ATO Website (legal database) for the word "Steele" will yield you enough scintilating reading to last a lifetime. You can read through the majority decision here though I believe (dont start reading it before 6am or you are in for a late night):
    Steele v Deputy Commissioner of Taxation [1999] HCA 7 (4 March 1999)

    Edit: Oh, and in answer to your question, not only in my opinion is it deductible but more importantly also in the opinion of the ATO and the courts
     
    Last edited by a moderator: 30th May, 2007
  8. lorrimer

    lorrimer Well-Known Member

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    Great news, thanks very much.
    I'm putting a deposit down on the land tomorrow and feel much happier about it now!
     
  9. coopranos

    coopranos Well-Known Member

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  10. MattR

    MattR Well-Known Member

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    lorrimer...

    coopranos is correct. Apologies for putting doubt in your mind. Steeles case...god I feel like a duckhead!

    Cheers and good luck
     
  11. FrankGrimes

    FrankGrimes Well-Known Member

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    Is it possible to build with the intention to rent the place out, therefore claiming the tax deductions. Rent the place out for 6 months to satisfy the ATO, then move in as a PPOR?

    Im not planning on doing this but could save alot for someone building their own place...
     
  12. MattR

    MattR Well-Known Member

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    Refer to TR 2004/4 and the ATO's guide

    Rental properties 2005-06

    refer to the sub heading "Interest on Loans".

    It would appear that as long as your intention on purchase of land and then building was to rent the property, then the interest will be deductible. When you change your intention to making it your home, then the interest is no longer deductible.
     
  13. Redwing

    Redwing Well-Known Member

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    Whilst we're on this subject just to clear things up in my mind ; how about if you decided to change your mind and sell the property once constructed rather than renting it out.

    Same for Land where the intent was to build an income producing rental IP

    These would both be allowed to have interest as a deduction would they not..?
     
  14. MattR

    MattR Well-Known Member

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    You may also want to consider if there are GST implications for this change in mind. Probably not, but you'd want to do some homework first just to make sure you're not carrying on eneterprise.
     
  15. coopranos

    coopranos Well-Known Member

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    In such a circumstance I would imagine that you would have to go back and amend prior year returns and remove the interest deduction, and then include the interest as a cost base item.
    I think there is a line at which you can argue the idea of intention, as always the ATO arent a computer so you cant just try and find a semantics argument and then expect it to fly with them. I have no idea whether you could successfully argue that you claimed the interest and costs during construction and only rented it out for 6 months before moving in. I would suggest that if looked at it would probably not be looked at favourably.
     
  16. Redwing

    Redwing Well-Known Member

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    Sorry Cooprano's,

    I musn't have been clear

    In both cases the intent is to build an income producing IP (no moving in), however, in case One I find i cant afford to keep it once I'm paying the full loan amount and sell it (having claimed interest whilst being built).

    In the second case I purchase the land and claim the interest as I intend to build a IP on it, again, circumstances change and I sell up having claimed interest whilst waiting for an IP to be constructed, in fact I probably have plans drafted as to the house i was going to build as an investment

    hmm..or get DA and sell the land and DA approval for a few units