IP Expenses when not Rented - Ormistons Case

[Tom Alaka]

Hi Everyone,
Im gearing up for tax time and have a query - I bought an IP over a year ago and basically sat on it until just recently.

Ie - I did very little reno work, I didn't get a tenant, I almost 'forgot' it was there (well i was busy with other work). It wasnt used at all for personal purposes.

It is now tenanted.

Re Ormistons Case (2005 AATA 978), (thank the guys at Ban Tacs for their informative newsflashes), it seems that all rental expenses are claimable in the circumstances.

So I can claim every cent of the IP bank interest for this period of 'inactivity'??

Seems hard to believe, in light of historic ATO responses on this issue.

 

[Tom Alaka]

Its also worth pointing out that the property is in a coastal regional town

So the distance is a big reason why I didnt get up there to properly inspect, work on and rent it out sooner.

 

[depreciator]

A property doesn't have to be rented, but it does have to be 'available to rent'.
Being a coastal property, you might have to prepared for the inevitable assumption that you were using it yourself as a holiday house. I wonder how you'd prove you weren't using it?

 

[Tom Alaka]

Proving I wasnt using it? hmmm probably not too hard to prove - a stat dec from my employer stating the dates i was on holiday.

Plus credit card records to show i was making purchases several hours away in Brisbane or other places during my holidays. Shouldnt be hard to piece together.

My main query re all this - is 'available to rent but not yet rented' wide enough to cover the case where no agent was appointed, no ads placed in the papers. Just minor reno work.

 

[Mry]

How could you prove it was available for rent if it wasn't advertised as available for rent?

A seminar I went to stated that in order to get out of trouble here there should be at least an advertisement placed somewhere (ie local paper, local pub notice board, internet) otherwise they would ask a hard question to answer - If it was available for rent, why didn't you advertise? Did you expect someone to look at the property, decide they wanted to rent it (in the absence of any indicators that it was available for rent), search the titles office, track you down and make an offer?

 

[coastymike]

Tom,

I'm sure I saw that advertisement on the local pub bulletin board for your property. It's a shame it got tore down. Surely some of your drinking buddies saw you put up the ad.

 

[Tom Alaka]

How could you prove it was available for rent if it wasn't advertised as available for rent?

Thats a good question. Do I have to?

In Ormistons Case, the investor arranged for agents to assess the rental on the property only. Off the back of these assessments, the investor decided to do some renovations himself (inc stumping) to boost rentals, which blew out to over 4 years of non rental beacuse of personal problems and inexperience. The work never got done and he sold the IP instead.

A reasoning for the decision was that what other purpose would the investor had for borrowing of the money and the incurring the high expenses and investment in time, if not to make it available for rent?

My situation is nowehre as extreme but the same principles may apply?

 

[Mry]

Ormiston had two agents who were able to come forward and state that he had purchased the house for investment purposes and sought their advice on the rental yield the property could obtain upon its purchase. He had documented proof of intention.

The other thing as well is that he was actively renovating the house to increase rent yield by the advice of the real estate agent until he split from his de facto and eventually forced to sell. According to your information, you did a bit of renovation and then let it stand for a while. That isn't good.

There is no presumption of innocence when you are audited by the ATO, you have to have 'self serving documentation' or your claim will be suspect.

The blasted problem of late is that 'intention' is becoming a reason to claim deductions in various tax office situations. How do you measure intention in a court of law? You look at the activities of the individual, especially documented ones. If no agent will come forward and make a statement that you asked them about rental yield, no minutes or documents support your intention, then the ATO could say that you intended to reno and sell and changed your mind when you decided to actively seek the first tenant. Ormiston could prove his intention. What can you do to disprove their claim?

All in all I do think you can claim over the period that you suggest, but you need some 'self serving documentation' to protect yourself with.

Good one Coasty.

 

[Bargain Hunter]

Tom,

If you purchased the property within a trust the minutes outlining the reasons the trust was interested in purchasing the property would possibly be acceptable as proof of intent.

If you haven't issued your minutes best do it now.

Regards

Andrew

 

[Tom Alaka]

Thanks guys, and especially MRY.

I did contact an agent eventually but it was several months later, so I will have to review all my records in detail.