Interest on vacant land is deductible

From: Marina .


After talking to a few people from the forum and going through various posts I noted that there is a lot of confusion to this question.

After searching the ATO website I found out that Interest on a loan taken out to fund the purchase of vacant land held for future income producing use is deductible under section 8-1.

In the case study it mentioned that it took the taxpayer 4 years to commence construction and in that time all interest was still tax deductible.

ATO ID 2001/307
 
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Reply: 1
From: Dale Gatherum-Goss


Hi

This is an area that has undergone quite extensive court action over the last few years and accordingly there is no clear answer to this question despite what you found.

Without wishing to be difficult, I am afraid that this question is best answered depending upon the actual facts of each scenario and may not be easily defined.

Sorry.

Dale
 
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Reply: 2
From: Simon St John


This is very interesting to me as i am in that position myself - vacant land settled last month and about to build in next 2 months and it is an IP to be let out.

I was under the understanding (from my accountant that interest NOT deductible on land.

Would certainly be interested in Dale's opinion on what facts/scenario might sway in favour of deductibility.

Does one seek a ruling or put in a return and wait and see?
 
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Reply: 2.1
From: Anony Mouse


All expenses are deductible if the purpose is income producing, e.g. rates, interest but you may have to have to spread acquisition costs e.g conveyancing over five years

"A government that robs Peter to pay Paul can always count on the support of Paul."
Of course, Paul's support is obvious, but it is equally obvious that to rob from Peter to pay Paul will make Peter
very, very angry.
My question is this: "How can you run a good government with a sore Peter?"
 
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Reply: 1.1
From: Marina .


I have copied the ATO Interpretive Decision to this question.
Please note this decision is current and it looks quite simple to me. You can claim this deduction if you are building an investment property on vacant land.

THE ISSUE:
Is interest on a loan taken out to fund the purchase of vacant land held for future income producing use deductible.?

DECISION

Yes, interest on a loan taken out to fund the purchase of vacant land held for future income producing use is deductible under section 8-1.

FACTS OF THE CASE

The taxpayer borrowed funds and purchased land with the intent of construction an Income producing dwelling. That intention remained constant during the time of the taxpayers ownership of the property.

The taxpayer incurred interest expenses on the borrowed funds.

For financial reason the taxpayer was unable to commence development of the property for a 4(four) year period

In that time the taxpayer saved for the construction, viewed display homes, .

Four years after the land was purchased the taxpayer engaged a builder. The property was built over a period of 8 months. The house was then let to tenants.

REASONS FOR DECISION

The High court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production.. Tax 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 a private nature

the period of interest 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 b/w outgoings (interest) and assessable income is lost.

The interest is incurred with one end in view, the gaining or producing of assessable income,

and continuing efforts are undertaken in pursuit of that end.

In the taxpayers case the interest was incurred on borrowed funds used to acquire a property that was solely intended to be used in income earning operations. In these circumstances the interest expense is not considered to have been preliminary or incurred at a point too soon before the commencement of the income producing activity.

Furthermore the taxpayers intentions throughout was to build an income producing building and there was no private or domestic purpose for holding the property. the Taxpayer was committed to the project and took steps to develop the property. The length of time b/w purchase of the property and commencement of construction is not considered to have been so long that the necessary connection b/w the interest(outgoings) and the assessable income is lost.


IN THESE CIRCUMSTANCES THE TAXPAYER IS ENTITLED TO A DEDUCTION FOR THE INTEREST EXPENSE UNDER SEC 8-1.

DATE OF DECISION 1ST AUGUST 2001
 
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Reply: 2.2
From: Dale Gatherum-Goss


Hi Simon!

Congrats on the development, I hope it works as well as you plan.

As a rule of thumb, some of the comments made already are pretty accurate in that if the intention to use the land to build a development for income producing purposes, then, you SHOULD be able to claim a tax deduction for the interest.

However, this is an area that the tax office like to attack as they feel that the interest is incurred in building the development and therefore part of the cost of construction.

In the last few years, there have been a number of court cases, such as the one quoted by Rusty, where the courts have found in the opposite direction as well.


In tax law, there is no such thing as a "black and white answer" that holds true for every scenario. The tax office are even known to argue against their own rulings which, bye the way, do not carry the force of law.

Good luck

Dale
 
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Reply: 2.2.1
From: Sergey Golovin


Agree with Dale,
“The tax office is even known to argue against their own rulings which, bye the way, do not carry the force of law.”

I also heard that sometimes they (ATO) even are willing to pay your court case if you prepared to stand up and challenge ATO openly in the court of law (whatever would be the reason).
The reason they do it is actually quite simple - to close loophole found by you or by your professional team.

My brother in-law was a partner in leather business/furniture (not any more, he does something else now) and found the way to get some of the tax back (they were overcharged by ATO) and was offered by the ATO to challenge the ATO. And his farther in-law (ex accountant) told him that the ATO might even pay the expenses if he is persistent enough. I can't remember if they did, sorry I did not follow up.


Serge.
 
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