IP Under Construction

[Dan20]

Hi all,

I've read that interest can not be claimed for an IP while it is under constuction. So only after it is occupied can interest be claimed. Interest for the construction period gets applied to the capital gain calculation at sale time instead.

If correct, is this also true for all costs? So in my example construction won't be complete this financial year, however i've paid for retaining walls, some landscaping (and interest on: land and completed construction). Will my tax agent help me claim any of these costs this financial year?

Thanks in advance

Edit- After more reading it seems:

Construction costs are considered part of the capital cost of the house. Not claimable untill a tennant is in the house. However interest on the land is claimable. I don't really see the logic here. It means instead of building a proper driveway while the house is under construction, i should just leave compacted rubble there, wait till a tennant is in then lay the driveway purely for tax reasons. Is that correct or am i dense :S

 

[Dan20]

From an old thread:

For some reason, there are people in the world who feel mortally wounded that they cannot claim all the costs of building a house for rental as they build it as a full tax deduction. As with any investment with tax consequences, see your accountant.

I tell people that if you buy a house, you can't claim a deduction for the house on acquisition. Why should someone be able to claim a deduction for the cost of the house just because they built it as opposed to someone who bought one with land? (Nevermind the no income-no deduction rule.)

As decided by a recent case, you can claim interest on land that you intend to build a rental property on. However, other costs (ie not interest) in building a property are not deductible, as mentioned, and form part of the capital base of the property once completed. Once the building is available for tenants, you can start claiming deductions. The article mentions practical completion as being the factor - that is incorrect. Once the building is up and you make it available for tenants, that is when you can start claiming, rented or not (I'd have a record of a call to a real estate agency or a copy of an ad in the paper as evidence). Most of the time this happens to the same day so it isn't really an issue.

I wouldn't rely on the article for accuracy in tax advice anyway. You are getting second-hand tax advice on a subject of some complexity. If they quoted an accountant on the record, that would be a different story altogether.

http://somersoft.com/forums/showthread.php?p=187139#post187139

 

[bombers86]

Hi Dan - I'm pretty much in the same boat. Did you manage to work it out with your accountant? So from what I've read, I've come up with these two conclusions:

1. You can't claim any interest on your loan until the new build is first advertised for rent

2. You can claim any additional capital works such as fencing/concreting/landscaping etc only if the works were completed/paid for after the property is first advertised for rent.

The main point here being, the interest and additional capital works become tax deductible from the point the house is advertised for rent, not actually tenanted?
Any help on this would be great!

 

[Terry_w]

Hi Dan - I'm pretty much in the same boat. Did you manage to work it out with your accountant? So from what I've read, I've come up with these two conclusions:

1. You can't claim any interest on your loan until the new build is first advertised for rent

2. You can claim any additional capital works such as fencing/concreting/landscaping etc only if the works were completed/paid for after the property is first advertised for rent.

The main point here being, the interest and additional capital works become tax deductible from the point the house is advertised for rent, not actually tenanted?
Any help on this would be great!

I believe that the interest and costs can be claimed well before the property is advertised for rent in circumstances where it is your intention is to build a rental property.

See Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139

and its analysis in

TR 2004/4 http://law.ato.gov.au/pdf/pbr/tr2004-004.pdf

Interest incurred prior to assessable income
9. It follows from Steele 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 private or domestic;
• the period of interest outgoings 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 between outgoings 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.1

 

[rugrat]

I believe that the interest and costs can be claimed well before the property is advertised for rent in circumstances where it is your intention is to build a rental property.

See Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139

and its analysis in

TR 2004/4 http://law.ato.gov.au/pdf/pbr/tr2004-004.pdf

Yep. We were able to claim the interest (what little we had on the deposit, the rest was settlement on completion) before construction was completed.

If you are using an accountant, talk to them. If not, it may be worth your money to find an investment property savvy accountant.

 

[Rolf Latham]

Hi Dan - I'm pretty much in the same boat. Did you manage to work it out with your accountant? So from what I've read, I've come up with these two conclusions:

1. You can't claim any interest on your loan until the new build is first advertised for rent

2. You can claim any additional capital works such as fencing/concreting/landscaping etc only if the works were completed/paid for after the property is first advertised for rent.

The main point here being, the interest and additional capital works become tax deductible from the point the house is advertised for rent, not actually tenanted?
Any help on this would be great!

what Terry Said

There is a lot of confusion between construction and "holiday homes"

Your view above is correct for a dwelling that is NOT available for rent for whatever reason.

The case mentioned by Terry is accepted pretty much as standard for a build, on the basis that the time limit is not exceeded. Dont expectto sit on a block of dirt for 10 years and expect it to be deductible, though in some cases it may be.

t
arolf

 

[bombers86]

I believe that the interest and costs can be claimed well before the property is advertised for rent in circumstances where it is your intention is to build a rental property.

See Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139

and its analysis in

TR 2004/4 http://law.ato.gov.au/pdf/pbr/tr2004-004.pdf

Thanks so much for your help. In my situation, I already owned the land so I was just paying interest on the construction costs as it was being built. Is this still refundable? Sorry, I get a bit confused over whether they're talking about the land or the constructions costs..

 

[bombers86]

what Terry Said

There is a lot of confusion between construction and "holiday homes"

Your view above is correct for a dwelling that is NOT available for rent for whatever reason.

The case mentioned by Terry is accepted pretty much as standard for a build, on the basis that the time limit is not exceeded. Dont expectto sit on a block of dirt for 10 years and expect it to be deductible, though in some cases it may be.

t
arolf

Oh thanks Rolf for clearing that up. Do you have any idea what the time limit is? I owned the block outright for 4 years before being able to fund the construction. The construction was always for the purpose of renting it out. Would I be able to claim back all interest cost plus additional capital works added that weren't done by the builder even if I didn't have tenants in at that stage?

 

[Aaron_C]

Oh thanks Rolf for clearing that up. Do you have any idea what the time limit is? I owned the block outright for 4 years before being able to fund the construction. The construction was always for the purpose of renting it out. Would I be able to claim back all interest cost plus additional capital works added that weren't done by the builder even if I didn't have tenants in at that stage?

There is no 'time limit'. It depends on the circumstances of the case. You have to show that you are actually actively trying to build the property through planning processes, applications, negotiations with builders etc. As rolf indicated, the longer the wait period, the more likely it is that there is no investment purpose to the construction of an IP, but this can be mitigated with the factors that I have illustrated above.

 

[Terry_w]

The Steele person took around 10 years to build, from memory.

If there are costs incurred in previous years that you didn't claim you may be able to amount your tax returns for up to 4 years and claim it. You can't claim capital costs though - but these can be used to reduce your CGT when you sell. Interest on capital costs could be claimed though.

 

[bombers86]

I went to my accountant. Again my situation was that I owned the land outright so wasn't paying any interest on that, I was only paying interest on the construction loan as the house was being built. He has told me I can't claim any of the interest I paid on the construction loan as it was being built because "Any interest while you are building is capitalised and forms part of the cost base (for CGT purposes) when you sell" - which is contrary to some of the above comments??

Also, he has told me that any capital works such as fencing, concreting, gravel, landscaping etc that was performed before the house was rented "form part of the base cost".. Therefore can't be claimed until selling either?

There seems to be so many conflicting opinions on what can be claimed and what can't.. Would it be worth going to see a purely property-investment accountant?

 

[Terry_w]

I went to my accountant. Again my situation was that I owned the land outright so wasn't paying any interest on that, I was only paying interest on the construction loan as the house was being built. He has told me I can't claim any of the interest I paid on the construction loan as it was being built because "Any interest while you are building is capitalised and forms part of the cost base (for CGT purposes) when you sell" - which is contrary to some of the above comments??

Also, he has told me that any capital works such as fencing, concreting, gravel, landscaping etc that was performed before the house was rented "form part of the base cost".. Therefore can't be claimed until selling either?

There seems to be so many conflicting opinions on what can be claimed and what can't.. Would it be worth going to see a purely property-investment accountant?

I've quoted case law above and the ATO's position in a tax ruling after the Steele case. Just show that to your accountant. Your circumstances may be different though and it maybe that you cannot claim now. If he says this ask him to back it up.

But if your accountant does admit he is wrong then just change as this is basic stuff and he could be costing you a fortune.