A long plea for help (maybe from Michael Yardney and/or DaleGG?)
I purchased a block with an old rundown house in December 2001. Purpose of acquisition was to demolish and redevelop (build 5 townhouses). The old house was rented for a few weeks in the 12 month period between purchase and demolition (difficult to rent because of poor condition). In this period, plans were prepared, submitted to council, revised and resubmitted, and eventually development approval obtained for 5 townhouses.
For tax year ending June 2002, I claimed loan interest as a deduction. My accountant had no problem with this, pretty standard stuff (the old house was "available for rental" since purchase). In Sep 2002 my accountant completed and submitted a Tax Variation Application on my behalf, which included a prepaid interest amount of $40,000 for the above property (which was my estimate of redevelopment/construction loan interest for the following tax year). The Tax Variation Application was accepted by the ATO, and I proceeded to pay less tax monthly upto June 2003.
Construction started in early Feb 2003. By end of May 2003, amount of construction loan drawn down was $650,000. I arranged with my bank to separate out this amount into a new IOA loan, and I prepaid the interest on $650,000 prior to end of June 2003. Prepaid interest amount was approx $40,000 (luckily pretty close to the estimate!).
Construction was completed in Dec 2003, and all 5 townhouse are now rented.
My tax returns for year ending June 2003 are in the final batch to be submitted by my accountant in a few weeks. I got a nasty shock today when he advised me that interest on the construction loan is not deductible, as there was no property available to produce income during the construction process.
I've searched thru' the forum archives and found some posts on interest deductability for construction loans. I found one dating back to Jan 2002 (a lady named Marina as well as Dale contributed to the thread). This referred to ATO ID 2001/307 which I've read on the ATO website (the status of this ATO decision is still current). I believe this ATO ID tells me clearly that the interest on a loan used to purchase real estate for redevelopment into income producing townhouses is deductible, even if there's no income producing property on it (i.e. vacant land). By extension I conclude that the interest on the construction loan is also deductible.
I found another dating back to Nov 2002 where Dale says "You can still claim interest as a tax deduction during the construction phase (courtesy of a court case or two over the last couple of yeras) even though you have no income from the property". I guess this refers to the Steele v FC of T case which lead to the above ATO ID 2001/307?
Sorry about the long query, but I couldn't simplify it any further. If the accountant is right, I'll have to find some cash in a hurry!! If I'm right, maybe I can get some sleep.
Thanks in advance for any feedback
Padraig.
I purchased a block with an old rundown house in December 2001. Purpose of acquisition was to demolish and redevelop (build 5 townhouses). The old house was rented for a few weeks in the 12 month period between purchase and demolition (difficult to rent because of poor condition). In this period, plans were prepared, submitted to council, revised and resubmitted, and eventually development approval obtained for 5 townhouses.
For tax year ending June 2002, I claimed loan interest as a deduction. My accountant had no problem with this, pretty standard stuff (the old house was "available for rental" since purchase). In Sep 2002 my accountant completed and submitted a Tax Variation Application on my behalf, which included a prepaid interest amount of $40,000 for the above property (which was my estimate of redevelopment/construction loan interest for the following tax year). The Tax Variation Application was accepted by the ATO, and I proceeded to pay less tax monthly upto June 2003.
Construction started in early Feb 2003. By end of May 2003, amount of construction loan drawn down was $650,000. I arranged with my bank to separate out this amount into a new IOA loan, and I prepaid the interest on $650,000 prior to end of June 2003. Prepaid interest amount was approx $40,000 (luckily pretty close to the estimate!).
Construction was completed in Dec 2003, and all 5 townhouse are now rented.
My tax returns for year ending June 2003 are in the final batch to be submitted by my accountant in a few weeks. I got a nasty shock today when he advised me that interest on the construction loan is not deductible, as there was no property available to produce income during the construction process.
I've searched thru' the forum archives and found some posts on interest deductability for construction loans. I found one dating back to Jan 2002 (a lady named Marina as well as Dale contributed to the thread). This referred to ATO ID 2001/307 which I've read on the ATO website (the status of this ATO decision is still current). I believe this ATO ID tells me clearly that the interest on a loan used to purchase real estate for redevelopment into income producing townhouses is deductible, even if there's no income producing property on it (i.e. vacant land). By extension I conclude that the interest on the construction loan is also deductible.
I found another dating back to Nov 2002 where Dale says "You can still claim interest as a tax deduction during the construction phase (courtesy of a court case or two over the last couple of yeras) even though you have no income from the property". I guess this refers to the Steele v FC of T case which lead to the above ATO ID 2001/307?
Sorry about the long query, but I couldn't simplify it any further. If the accountant is right, I'll have to find some cash in a hurry!! If I'm right, maybe I can get some sleep.
Thanks in advance for any feedback
Padraig.
