Build to rent interest deduction

Discussion in 'Accounting & Tax' started by NickWCBA, 29th May, 2022.

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  1. NickWCBA

    NickWCBA Well-Known Member

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    Hi all,

    I’m curious as to when interest charges can be claimed in a build to rent scenario.
    Is it only once a tenant is in the home? Or once the property is advertised for rent?

    Thank,

    Nick
     
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Not a tax guy, but recall recentish changes which now have interest deductability as of when available for rent - ie on the market

    ta
    rolf
     
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  3. Mike A

    Mike A Well-Known Member

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    An example given in the Explanatory Memorandum is as follows:

    Anna purchased a block of vacant land and built a new residential premises on it. Occupancy permits are issued for the residential premises once the building is considered suitable for occupation and the building is actively made available for rent.

    Anna can deduct the costs of holding this block of land to the extent expenses are incurred once the property is legally available for occupation and is leased, hired or licensed or otherwise available for lease, hire or licence.
     
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  4. NickWCBA

    NickWCBA Well-Known Member

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    That’s perfect! Thank you both for the quick response!
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    have a look at the latest ATO ruling on this. They imply that interest can be deducted on the building component of the loan before it is available for rent.
     
  6. Mike A

    Mike A Well-Known Member

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    I can't see in TR 2021/D5 where that is implied. Maybe i'm missing something.

    or you mean once it is "able to be rented". that i agree it doesn't need to have been rented.
     
  7. NickWCBA

    NickWCBA Well-Known Member

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    Do you have a link?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    no atm
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    ATO website is down now, it is in one of the examples they listed.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    And it makes sense too because the new laws were put in place to deny deductions on vacant land, but the principals of the Steele case can still apply to assets other than land.
     
  11. Mike A

    Mike A Well-Known Member

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    maybe we are talking about a different ruling but that ruling doesnt say that at all.

    Example 4 - existing residential premises that are not in use or available for use are demolished

    20. Continuing on from Example 3 of this Ruling, the tenants vacate the property in October 2019 because the residential premises has been declared by the local council as being structurally unsafe to occupy. Arun demolishes the property in December 2019. Any holding costs that Arun would otherwise be entitled to deduct from October 2019 when the residential premises were not legally able to be occupied would be limited by section 26-102 as the house is not 'in use or available for use'.
     
    Last edited: 29th May, 2022
  12. Mike A

    Mike A Well-Known Member

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    ahhh i think i know what you mean...interest on the build itself...gotcha
     
  13. Mike A

    Mike A Well-Known Member

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    Example 5 - new construction

    25. Harry purchases vacant land on 1 July 2019 and builds a house on the land. He obtains the occupancy certificate on 9 February 2020. Harry lists the property with a real estate agent for lease on 1 March 2020. Any holding costs that Harry would otherwise be entitled to deduct from 1 March 2020 will not be denied by section 26-102, as from this date the house is lawfully able to be occupied and available for lease.

    Loss or outgoing relating to holding land

    26. Subsection 26-102(1) clarifies that any interest or borrowing costs to acquire land are included as a cost of holding land. Examples of other costs of holding land include council rates, land taxes and maintenance costs.

    27. In the context of section 26-102, we do not consider the costs of constructing a substantial and permanent structure on the land, or any interest or borrowing costs (to the extent they are associated with construction), to be a loss or outgoing related to holding land.
     
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  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It was the next example that I had in mind

    Example 6 - interest expense for multiple purposes

    28. Giovanna takes out a mortgage to purchase a vacant block of land in September 2019. Giovanna intends to build a house on the land (which she will rent out). Giovanna does not carry on a business. Giovanna takes out a separate loan for the construction of the house. Giovanna will not be able to claim a deduction for her interest expense which relates to acquiring the land until the house is lawfully able to be occupied and leased or available for lease. If a deduction is otherwise available for the construction loan interest expense, Giovanna will not be prevented from deducting the expense by section 26-102.
     
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  15. Mike A

    Mike A Well-Known Member

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    yes both examples confirm the same
     
  16. NickWCBA

    NickWCBA Well-Known Member

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    Ok so just to clarify. In this scenario I’ve demolished an existing home and in the process of building townhouses. Tenants vacated in March 2022. Building commenced in April 2022. The intention on completion is to rent. Is the construction portion of the loan deductible over the build period?
    I’m still reading these examples as a no.
    If that’s the case, seems crazy that’s it’s not.
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The interest on a loan used to construct a property you intend to rent out could be deductible - see the example that I quoted above. The ATO are using the word 'mortgage' when they should be using 'loan' but:
    If a deduction is otherwise available for the construction loan interest expense, Giovanna will not be prevented from deducting the expense by section 26-102.
     
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  18. NickWCBA

    NickWCBA Well-Known Member

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    Perfect! Thanks for your help gentlemen.
     
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  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    make sure you structure loans so you can avoid apportionment issues. A separate loan for the land and build.
     
  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    In most cases that not a concern if the initial loan is $XXXX for the land then further borrowings are drawn specifically for construction. The loan may be initially blended during the construction phase but the two elements may be easily apportioned on a % basis that may need to be recalculated at each draw down. Many lenders may require a construction loan to be a single loan and that poses no major tax obstacles. LMI etc may also be implicated and need specific tax advice.
     
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