As usual RobG is correct.
Many people quote Steele's case but also forget Temelli's case where the interest wasn't deductible.
In Temelli's Case, investors bought a vacant block of land, intending to erect a luxury house on it for rental. They paid some hundreds of dollars to have plans of the proposed house drawn up by an architect, but took no further action towards construction of the dwelling and renting it out. The Federal Court did not allow a deduction for interest and rate expenses incurred on the land, saying at ATC 4721; ATR 422:
Whilst it can be accepted that the acquisition of the Wyuna Court land and the preparation of plans early in 1989 is evidence of some commitment, those steps fall short of a commitment to the income producing element of the project, being the building of the home.'
The court contrasted the efforts made by these owners with those made by Mrs Steele, considered by the Federal Court in Steele's Case, quoting the efforts made by Mrs Steele, at ATC 4719, ATR 420:
?she obtained the Council's assent to a change of zoning, employed architects and engineers, entered into joint venture arrangements, and pursued the project with some tenacity until litigation with her collaborator put a complete stop to it. She demonstrated her 'commitment' from the beginning by committing $1,000,000 to the venture plus the time, energy and considerable expense of the subsequent architectural and engineering work, and negotiations with the local Council, sewerage authority and prospective joint venturers and financiers.
This indicates that continuing activity, aimed at eventually producing assessable income is required if the costs of holding a property with the idea of later producing income from it are to be deductible.
This was also found in the Administrative Appeals Tribunal case, Ormiston v. FC of T 2005, (2005) 60 ATR 1277 (Ormiston's Case). In that case, deductions for interest and other expenses were allowed for a property that was still not income producing after nearly five years. However, it was shown that the taxpayer had over the whole period made continued efforts in pursuit of the property being income producing. While the AAT had some difficulty understanding the time delay, they found in favour of the taxpayer on the basis that they could not find what other purpose the taxpayer would have had in borrowing the money and incurring substantial interest and other costs as well as the substantial investment of the taxpayer's time and work