Steele's Case and Vacant Land

[Boy-in-Blye]

Hi All,

My accountant insists that I cannot claim expenses against my vaccant blocks of land, even when i showed him Steele's Case. He states that because steele's case related to commercial development that it can be distinguished. I asked him to seek advice from a legal consultant who 'apparently' says the same thing.

From what i read, they might both me mistaken.

I am currently building two townhouses for investments and the planning process has taken longer than expected (due to matters beyond my control). Construction began last week.

Does anyone have any experience with Steele's case, and the ATO in relation to residental developments?

 

[Rolf Latham]

Im no bean counter but It should not matter that the Steele vs ATO case was on commercial property.

The issue is that the intent is to produce taxable income, not capital in nature.

Im sure the Accountants will set me right though
ta
rolf

 

[Boy-in-Blye]

I just found some further information in relation to this on the ATO website in the rental properties 2008 PDF they provide.

Here is the email i just fired off to my accountant!

Hi xxx,

I’m still not satisfied with the answer surrounding Steele’s case.

Can you please refer to Page 10 of the attached document, in particular, column 2, paragraph 3.

“Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes – for example, you decide to use the property for private purposes and you no longer use it to produce rent or other income – you cannot claim the interest after your intention changes.”

This document was found on the ATO website.

This document contradicts the advice you have received from your consultant.

Regards

 

[Rob G.]

See Ormiston v C of T [2005] AATA 978

Regarding purchase and 4 year improvement of investment property with no rent ever received.

Claimed interest as a deduction since there was "reasonable" expectation that the exercise would result in producing assessable income.

Cheers,

Rob

 

[Boy-in-Blye]

Thanks Rob, i was aware of the 4 year rule, but i wasn't aware of the case. I'll definately have a read!

I'm a prosecutor and I have experience interpreting case law but only in the criminal jurisdiction... I'm certainly no expert in relation to tax legislation!

The question still stands.... Is my accountant wrong?

 

[nonrecourse]

I just found some further information in relation to this on the ATO website in the rental properties 2008 PDF they provide.

Here is the email i just fired off to my accountant!

Hi xxx,

I’m still not satisfied with the answer surrounding Steele’s case.

Can you please refer to Page 10 of the attached document, in particular, column 2, paragraph 3.

“Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes – for example, you decide to use the property for private purposes and you no longer use it to produce rent or other income – you cannot claim the interest after your intention changes.”

This document was found on the ATO website.

This document contradicts the advice you have received from your consultant.

Regards

Hello Boy-in-Blye;
What a ripper of a post. You have demonstrated is that YOU ARE THE EXPERT. What you have also demonstrated is that your advisors have clay feet and as such what else have they missed ?

At the moment we are going through a wee bit of grief with an auditor because of an advisor who turned out to be a turkey many moons ago. When we saw the GFC coming we took back the book keeping duties and surprise surprise our current highly recommended accountant isn't up to speed with the internet and the ATO website either.

Over the years we have learned that no one has your interest at heart like you do. With accountants it is all care and no responsibility. You are responsible for their stuff ups as it is you who sign on the dotted line.

In the past we have heard the gratuitous advice " leave the accounting to the experts". Our experience is that is analogous to mums and dads parking their brains at the front desk when they go in to see a financial planner.

In our case we took the properties back from the real estate agents and manage them ourselves. We do our own books. I joined the national tax accountants association and did a number of seminars on trusts and asset protection. Am currently booked in to learn the fundamentals of preparing an "I" return and the fundamentals of a business return. After that I'll look at doing a diploma in basic accounting.

Too hard you say? For the first time since I started my own business in 1991 I feel in control. I use to come out of the accountants office with a headache and not sure of where I was... sound familiar

I now save $8000 a year in book-keeping and by doing the basic accounting I would save another $15,000 a year. That is a total of $23,000 a year that could be better spent seeking out a Collins Street Property tax/trust Lawyer for specific advice as needed.

Part of the art of extracting advice from "real experts" is Knowing the right questions and at least part of the answer.

I realise for most employees this is too high a wall to climb. If however you own and operate a small business you really have no choice

It is all about increasing your fiscal literacy that will allow you to be a better business operator and in the end a better investor.

 

[Rob G.]

Thanks Rob, i was aware of the 4 year rule, but i wasn't aware of the case. I'll definately have a read!

I think the "4 year rule" you refer to is actually the period you may claim your main residence CGT exemption from when first acquiring/building and cannot immediately occupy.

Case Law for interest deductions (and others on the revenue account) mostly revolve around interpretation of s.8-1 ITAA97, the General Deduction provision.

There is plenty of court decisions to show that expenses do not have to be incurred in the actual year that income is received. Nor does income have to be an absolutely certain outcome - just a 'reasonable' expectation.

Usually the Commissioner will argue that an outgoing occurred to soon to be sufficiently connected with the income producing activity.

He usually chips in an argument that the expense is also of a capital nature where it involves acquisition or creation of a capital asset.

We can only guess your details, but it wouldn't hurt to get a second opinion before applying for a Private Ruling.

Good luck,

Rob

 

[asdf]

Part of the art of extracting advice from "real experts" is Knowing the right questions and at least part of the answer.

How true. With the net you can google anything these days but having a basic grasp of financial and and taxation concepts doesn't hurt either.

In your instance, it is a widely held view that holding land, with the intention of making it income producing, ie. building a house to rent out will be OK. However if its simply for speculative cap gains, then its not. But you never tell the ATO that. Even if you don't intend to build, start collecting business cards, quotes from project builders, info packs.. etc .. so that when big brother comes knocking, you can easily substantiate your initial intention. And if you so I'd run something like "the GFC hit and my poor sick mum needed money to pay for elective surgery... so I had to sell the place without actually building on it..." you get the drift.

Hows the DPP these days?

 

[Boy-in-Blye]

Accountant's reply to my email.

In the paragraph prior to the one you have quoted it is stated:

"However, the property must be rented, or available for rental, in the income year for which you claim a deduction."

Section 8-1 of the Income Tax Assessment Act states:

"You can deduct from your assessable income any loss or outgoing to the extent that:

a) it is incurred in producing assessable income; or
b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income."

The main issue in your situation is that you have no assessable income (i.e. rent) to apply the interest against. In order for this to be possible we would need to demonstrate a precedent outlined in a prior case where interest was allowed to be deducted where no income has been generated.

Steele's case has been considered and deemed in our view insufficiently similar to justify it being applied. This view was also held by our external consultant who provided a case similar to yours where the ATO knocked back the interest claim (I will forward you the consultant's email).

The thing to remember in this situation is if the ATO is to look at you they will apply case law in making their decision. The document you have provided, even though from the ATO website, will not be enough in proving your case. This is only provided as a guide, it is not a binding ATO document.

The only way to be certain of knowing if it is deductible or not would be to apply for a private ruling from the Tax Office. There would be cost involved in preparing this.

Let me know how you wish to proceed.


I dont work for DPP, I work for vicpol, prosecuting Magistrates Court

 

[AlmostBob]

or
b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income."

seems obvious

cant make a development application if you don't own the land
development is for making money
development application is in process,

 

[Rob G.]

So a mere AAT case such as Ormiston is not compelling ?

The ATO has a habit of ignoring more senior legal decisions !

Cheers,

Rob