Deductions during construction

[sandyfeet]

I made some enquiries with an accountant re: deductions for expenses during construction and I got a confusing message:

We settled on the land June 2013, began construction in oct 2013. They were available for rent April 2014 and tenanted June 2014.

I was of the belief that: the interest on the land portion and rates were deductible so long as we began construction within a reasonable timeframe? Second to that we can not claim any interest on the build payments until the dwellings are available to rent, so I also thought any interest incurred after april 2014 for the construction portion was deductible?

I was given a message by the accountant that it may be a concern to the ATO, that as they were only tenanted for 5 weeks I can only show $3500 income and deductions of about $12k (interest+ depreciation) showing a large loss.

It was also suggested by the accountant that the loss would be carried forward to the following FY for when this IP makes a profit?? Can't this loss offset profit from another IP or my other income?

 

[coastymike]

Refer the accountant to steele v fct. After that since you are in sydney give paul a call so you can change accountant.

 

[sandyfeet]

Yes my wife and I were just talking about finding someone from SS who actually knows this stuff inside out! Paul has always been great on here and I'm sure others would recommend him?

So is my assessment reasonable or I am I still missing something significant?

Thanks,

 

[Aaron_C]

Why wouldn't you be able to claim the full interest deductions during construction??

 

[sandyfeet]

I don't know, I thought interest on construction was only deductible once the property is available for tenancy. I could be wrong, can anyone confirm this? I'll happily deduct it all if its allowed

 

[Paul@PFI]

Common stupid accountant mistake.

IT IS DEDUCTIBLE (provided you continue to rent). Does it look weird claiming $12k v's $3k income. Yep. Is it wrong. NO. That's the precise issue you do want it to offset other income.

I'm more concerned by view it carries fwd .....I suspect the stupid accountant is applying the non-commercial loss rules. These dont apply to property rental losses. You have every right to be concerned.

Don't walk away...Run. I'm happy to review the draft return. If its wrong I will tell you what you need to tell the accountant to jump. Don't pay them - You shouldn't pay for bad advice.

DURING construct you can claim interest, rates and water. AFTER construct you can claim neg gearing. Its worth a review of last year.

Contact details below (Direct email)

 

[Aaron_C]

I don't know, I thought interest on construction was only deductible once the property is available for tenancy. I could be wrong, can anyone confirm this? I'll happily deduct it all if its allowed

Yeah I think this is a classic example of the Steele case I would get someone who knows what they are doing...this can cost you big money.

 

[Paul@PFI]

The key issues in Steele's rely on the property being rented as soon as practicable after construct has ended AND continuing.... Its a fairly easy test.

One issue some accountants and taxpayers get put off by is that the ATO rental income schedules in software (incl etax) have a zero income test. If there is zero income it rejects as an error. Technically a Steele's claim should be made as a business schedule then after build it converts to rental schedule.

 

[Aaron_C]

One issue some accountants and taxpayers get put off by is that the ATO rental income schedules in software (incl etax) have a zero income test. If there is zero income it rejects as an error. Technically a Steele's claim should be made as a business schedule then after build it converts to rental schedule.

Conspiracy theory with the ATO to deter would-be investors from claiming their full negative gearing?

 

[sandyfeet]

Wow, thanks guys,

Paul, can you please explain further the difference before and after construct? Is it just that after construct, all expenses and depreciation become deductible too?

Thanks for your offer, I will take you up on that! I expect the draft early next week,

Thanks

 

[sandyfeet]

Wow, thanks guys,

Paul, can you please explain further the difference before and after construct? Is it just that after construct, all expenses and depreciation become deductible too?

Thanks for your offer, I will take you up on that! I expect the draft early next week,

Thanks

That is all expenses, not including improvements obviously,

 

[Aaron_C]

Paul, can you please explain further the difference before and after construct? Is it just that after construct, all expenses and depreciation become deductible too?

It's always deductible insofar as it is used to produce assessable income except if the expenses are of a capital nature. This means that the actual cost of building the properties are not tax deductions (capital nature) but the expenses associated with the build (land tax, interest) are deductions.

Your accountant is probably confused with the non-commercial losses limitations which seeks to prevent people from running businesses that generate no sales/income but whose sole purpose is to generate losses to write off taxes on other profitable businesses/income.

 

[Rob G.]

Section 8-1 deductions such as interest (interest being the only one tested in the High Court in Steele's case - who was a business and not a passive investor) from date taxpayer has committed to a continuous effort to construct an income produceing structure on their land.

Capital allowances, from the date the asset is used for a taxable purpose - this is after being installed and is actually used.

Capital works, from the date your area of construction expenditure is used for a Division 43 purpose - this is after construction is finished and the building actually used.

 

[albanga]

Hey Paul,
You mentioned "provided you continue to rent". Could you eleborate on this?
I am in the process of subdividing and about to build at the rear. I live in the front property as my PPOR.

Can I claim the interest on the rear construction in this scenario?

 

[Paul@PFI]

Hey Paul,
You mentioned "provided you continue to rent". Could you eleborate on this?
I am in the process of subdividing and about to build at the rear. I live in the front property as my PPOR.

Can I claim the interest on the rear construction in this scenario?

Good pick up....If you rented the property for 3 months then sold it I would consider that your intent wasn't to generate assessable income from rent. The ATO might challenge the interest claim on the basis of Steele's....I said "continue" to distinguish between a person who does a rent dump & run v's one who does so with intent to rent long term.

I don't know your intent and cant provide an opinion. However if you build and purpose is to keep it and rent it long term...Yes I see no issues.

 

[albanga]

Thanks for clarifying Paul that does make perfect sense.
Could I ask from your experience is it a common thing that developers would construct a propery and then rent it for say a year or so.
This way they could LEGITIMATELY claim the interest deductions and also by holding for a year get a 50% CGT reduction.

 

[Terry_w]

Thanks for clarifying Paul that does make perfect sense.
Could I ask from your experience is it a common thing that developers would construct a propery and then rent it for say a year or so.
This way they could LEGITIMATELY claim the interest deductions and also by holding for a year get a 50% CGT reduction.

If they were developers they may still not be able to claim the interest against income.

Developers also seem keen on getting things sold quickly so that they can begin the next project.

 

[Paul@PFI]

If they were developers they may still not be able to claim the interest against income.

Developers also seem keen on getting things sold quickly so that they can begin the next project.

Most don't. Like Terry said they sell fast. Some may rent it when the market craps out and then after a while ask agent to sell it with tenant etc. Harry Triguboff of Meriton Apartments is/was Australia's largest landlord when property market stalled after a building boom a few years back.

They WILL NOT GET THE 50% CGT DISCOUNT. A developer does not even need to consider CGT. Their profit is ordinary income. CGT is a "new" tax concept. The 1936 tax act has always taxed profits of property dev.

 

[albanga]

They WILL NOT GET THE 50% CGT DISCOUNT. A developer does not even need to consider CGT. Their profit is ordinary income. CGT is a "new" tax concept. The 1936 tax act has always taxed profits of property dev.

Pardon my ignorance on this question but what makes a property developer in the eyes of the ATO?
Is it as simple as they have a property development company?

Or is say an investor using a development strategy who builds 3*3 unit developments in a year classified as a developer in the eyes of the ATO?

 

[Terry_w]

You will have to review the case law on this but basically anyone building to sell would be taxed as revenue and anyone building to hold to invest would be taxed on capital account.