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    • #1274
      Andrew Gill
      Participant

      I am having a debate with a colleague in respect of the deductibility of interest and other running costs prior to the sale of a rental property. Typical example of a property that has always been a rental property. Tenant vacates the property and the owner puts it on the market to sell. The property is vacant for a number of months until the property is sold and settled. I believe the interest, council rates etc are deductible as they relate to the income earning rental property, albeit that the property has stopped earning income. I believe this is supported in TR 2004/4. Colleague’s opinion is because the property has stopped earning rent and is no longer available for rent the expenses should be capitalised and form part of the cost base when calculating the capital gain.

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    • #1282
      Leanne Carter
      Moderator

      Hi Andrew, thanks for posting your question to our Community Platform – would anyone else like to add to the debate between John and his colleague?

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    • #1295
      RobynTax
      Moderator

      Hi Andrew

      My thoughts are that the ATO’s position in TR 2004/4 is about interest that is incurred after the relevant income earning activities (whether business or non-business) have ceased. The Commissioner accepts that interest may continue to be deductible where the asset representing a borrowing has been lost to the taxpayer (e.g. the asset is disposed of but the borrowing continues on foot) provided the nexus between the outgoing and the former income earning activities is not broken.

      I don’t consider that TR 2004/4 applies to allow deductions for interest incurred during the period where the property was formerly rented but is vacated for a ‘number of months’ prior to sale/settlement.

      A further consideration is s 26-102 of the ITAA 1997 which limits the operation of s 8-1 where the outgoings relate to holding vacant land. At first glance, you may conclude the land is not vacant as it has a house (i.e. a substantial and permanent structure) on the land. However, s 26-102 applies to deny deductions for holding costs where there is no substantial and permanent structure on the land in use or available for use in carrying on a business. The various exclusions in s 26-102 would seem not to apply in your case. Where s 26-102 applies to deny deductions for holding costs, they may qualify as third element of cost base.

      So, my initial thoughts are that, in your situation, the interest and council rates would likely be capitalised into the cost base of the property either because:

      • the interest is not deductible under s 8-1 because the property is not being used for an income producing purpose during the period after the tenant vacates the property and before the sale of the property (in which case, s 26-102 has no work to do because there is no deduction under s 8-1); or
      • if a deduction is available under s 8-1, then s 26-102 likely applies because there is no substantial and permanent structure in use or available for use on the land in carrying on a business, in which case the interest and council rates are not deductible (but may form part of the cost base of the property).

        I don’t have all the facts, but these are some provisions and issues for you to consider.

        Regards

        Robyn Jacobson, CTA
        Senior Advocate
        The Tax Institute

        Disclaimer: The above response should not be treated as professional advice and readers should rely on your own enquiries in making any decisions concerning your own interests or those of your clients.

      • This reply was modified 1 month, 1 week ago by RobynTax.
      • This reply was modified 1 month, 1 week ago by RobynTax.
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