Interest on land value

From: Ken .


Hi all,

Have been reading the 01/02 rental properties ATO Tax guide. In regard to interest, it says that the interest charged on a loan to purchase a rental property can be claimed as a deduction, provided the property is rented or available for rental in the income year that the claim is made (I'm sure this is not news to any of you.)
This means that if you buy a house and renovate it straight away, you cannot start to claim a deduction on the interest until you are finished and make it available for rent (I know some put a 'for lease' sign out front to try and get around this, but is that legal?)
The rental guide also says that the interest on a loan to purchase land to build a rental property on is deductible from the time you took it out.
My Question is - Could you claim a deduction on the interest of the Land Value component of the house above that is being renovated prior to rental?
eg. Purchase Price - $100k
renovation Cost - $20k
Borrowings - $120k
Land Value (rates notice) $40k
Claim deduction for interest on $40k for renovation period.
I'll be interested to see what your thoughts are on this (especially. Dale)

Thanks

Ken
 
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Reply: 1
From: Dale Gatherum-Goss


Hi Ken


>Have been reading the 01/02
>rental properties ATO Tax
>guide. In regard to interest,
>it says that the interest
>charged on a loan to purchase
>a rental property can be
>claimed as a deduction,
>provided the property is
>rented or available for rental
>in the income year that the
>claim is made (I'm sure this
>is not news to any of you.)


I do not believe that the tax office view in his regard is entirely correct at law.


>This means that if you buy a
>house and renovate it straight
>away, you cannot start to
>claim a deduction on the
>interest until you are
>finished and make it available
>for rent (I know some put a
>'for lease' sign out front to
>try and get around this, but
>is that legal?)


As a matter of fact, a recent court case found the exact opposite applied providing there was not too much of a delay between the purchase the rental income.


>The rental guide also says
>that the interest on a loan to
>purchase land to build a
>rental property on is
>deductible from the time you
>took it out.
>My Question is - Could you
>claim a deduction on the
>interest of the Land Value
>component of the house above
>that is being renovated prior
>to rental?

Not necessary. Claim the interest on the full amount given court cases clarifying the law over the last few years.


Have fun

Dale
 
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Reply: 1.1
From: Peter Henery


Hi Ken,
Refer your money man to Steele's case. Dale's right... as your intentions are bona-fide, all interest should be deductible.

Peter H
 
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Reply: 1.1.1
From: Ken .


Thanks Dale and Peter

My reading of Steele in the High Court in 1999, was that, as the INTENTION of her buying the property, was to EVENTUALLY earn assessable income from it, then she was entitled to claim a tax deduction for the interest on the loan she took out to buy the property.

Very abbreviated, but sound right?

There is mention in the court orders that the matter should go back to the Administrative Tribunal, did this happen? as I can find no later reference to it in Austlii.

Thanks Ken
 
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Reply: 1.1.1.1
From: Dale Gatherum-Goss


Hi Ken

Yes, the issue did go back to the AAT. However, this is not always reported because it is a forgone conclusion what the result in the AAT will be at that point. After all, they have effectively been instructed as to what the law should mean in this situation.

Bye the way, this is not the only case that applies here, but, it is the land mark case for now.

Have fun

Dale
 
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