Can I claim deduction for loan interest on vacant land during construction?

Discussion in 'Accounting & Tax' started by property_geek, 10th Aug, 2016.

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  1. property_geek

    property_geek Well-Known Member

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    I am building a house (investment property) on vacant land which will be rented out immediately after completion. Can I claim expenses (interest paid on land loan + construction loan) while the construction is in progress?

    There was around 6 months gap between the time when the land was settled and DA was lodged in council as I was working with builder to finalize drawings and tenders etc. Can I claim interest for full duration – that is from the day land was settled up to the construction completion?

    It will be around 18 months in total (6 months for finalising builder, reviewing tenders, drawing, preparing DA etc + 12 months for DA approval and construction).


    Regards,

    Ravi
     
  2. Terry_w

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

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    Could be possible depending on the circumstances. I think i have a tax tip on this.
     
  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Typically yes

    Steele v ATO

    But dont try it with some of the lenders if you need gearing for servicing

    ta

    rolf
     
  4. Paul@PAS

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

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    Rolf - I agree with the response but can you explain the servicing and lender issue. I assume you mean that the neg gearing "benefit"cant be called income and assist servicing calcs. I would see their position here.

    IMO each investor needs to obtain personal tax advice. There could also be a scrapping deduction if an existing dwelling is a knockdown etc. Other deductions cant usually be claimed but in some unusual instances they can.
     
  5. property_geek

    property_geek Well-Known Member

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    @Paul@PFI What Rofl said is true. My lender (cba) considers interest paid on vacant land as non-tax deductible. Hence reducing my serviceability "on paper".

    I didn't argue with bank over not being sync with ATO rules on this topic.
     
  6. Paul@PAS

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

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    I have seen other lenders allow interest to be capitalised etc and refinanced after completion with minimal impact on servicing (initially). More common with Commercial build lends (4 units+) I guess. I leave all client financing issues to the finance pro's and just ensure I refer clients to a good broker.
     
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  7. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Vacant land is not considered an investment by most lenders as it currently produces no income and even of the intention is to build and rent that may never happen. Once income is produced (once new house is rented) then any negative gearing benefits can be applied in the servicing calc improving the nett income due to a tax refund for negative gearing.

    I would have thought holding costs for the vacant land could be deducted retrospectively once it is income producing aka rented?
     
  8. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    So can I have PPOR rates please Mr Bank :)

    ta
    rolf
     
  9. DaveM

    DaveM Well-Known Member

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    Generally land holding costs are deductible (as Rolf mentions re Steele vs ATO) so long as the intention was to build for investment and building starts within a reasonable timeframe.
     
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  10. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Yes you can sir, until the IP is constructed :)
     
  11. John Bone

    John Bone Well-Known Member

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    My understanding of the rules regarding tax deductibility of any expenses including interest is that they are not deductible against income because there isn't any. All expenses are capitalised and form part of the cost base for CGT purposes up to the point where the property is available for rent. Once rented, the interest can be claimed against the income.
     
  12. Rob G

    Rob G Well-Known Member

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    High Court of Australia, Steele v FC of T 91 ATC 424, or (1999) 41 ATR 139

    The Commissioner's established position in TR 2004/4
     
  13. Mike A

    Mike A Well-Known Member

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    that is incorrect.
     
  14. sanj

    sanj Well-Known Member Premium Member

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    Just a thought, if you're going to come out of nowhere, immediately identify yourself as not only an expert in property with special systems or whatever like in other posts, but also having comprehensive taxation knowledge in multiple jurisdictions, maybe either try to get things right as often as an expert should or don't speak in such absolutes.

    People are going to read it, take it at your word that you're a highly skilled expert and listen to your repeatedly wrong advice.

     
  15. Paul@PAS

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

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    Incorrect. Steele's decision was about timing. Expenses can be incurred prior to or after income and Steele's was about that aspect of the general deduction principles for a specific taxpayer issue. Can a deduction be claimed in anticipation of expected future income ? Is it "too-soon" ? Other examples of deductibles that wont match income in a direct "matching principle" can include prepaid costs, deferred deductions like borrowing expenses, depreciation etc

    The ATO has also recently issued a private ruling to a taxpayer where some initial repairs can be deductible if the taxpayer and the vendor they buy from satisfy some conditions (eg the vendors owns a IP and earns rent. Sells to Fred with a tenant. Tenancy ends three months later...Fred can repaint and it is deductible)

    There is also a issue relating to scrapping deductions which can be poorly understood and over or under claiming is unfortunately common.

    Rental property deductions are complex (at times) and guidance from an experienced adviser is needed by many taxpayers from time to time. Take care with posting a response in a technical area such as tax , law etc as whit may appear to others as advice or guidance by making statements of fact. A lesson too for PCérs that weight should be given to those post indicating their expereince, qualifications etc...Business Members.
     
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  16. RoadRunner

    RoadRunner Well-Known Member

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    After the law changed from July 2019, I know one can not claim deduction on vacant land.

    At what point one can start claiming deduction? Once construction is completed and owner received occupancy certificate? Or when the property is advertised on rent?
     
  17. Mike A

    Mike A Well-Known Member

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    1.14 A special rule applies to land that contains residential premises within the meaning of the GST Act. Such structures are disregarded and the land is treated as remaining vacant until the residential premises are:

    • able to be occupied under the law; and
    • leased, hired or licensed or available for lease, hire or licence

    This test means a taxpayer cannot deduct the costs of holding land containing residential premises until the taxpayer is actively seeking to derive income from the property
     
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  18. Paul@PAS

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

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    Yeah that rule is pretty tough. I have encountered some who race to get a early occ cert which is not enough. As well an agency enagement isnt enough. What is needed is those two factors AND ALSO the property is completed and ready for tenancy.
     
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  19. Mike A

    Mike A Well-Known Member

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    not even just "ready for tenancy" but actually available for lease. if the client intentionally didn't put it on the market or had such a high market rent noone would conceivably rent it it would possibly be ready for tenancy but not available for tenancy.
     
  20. Paul@PAS

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

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    I recently saw a property with an occ cert that was for sale. It had no flooring, not much lighting (bayonet), cold water connected with a flushing loo (one), some power connected and no paint on lined walls which still needed finishing as well as cornices, architraves, doors and fix out. No staircase but a temp scaffold ladder. I was astounded that it complied. The yard ? None. No driveway. It likely needed $70K spent on it but the builder doing it went bust.

    What surprised me was how hard it was to sell. Lenders wouldnt touch it either. Ideally a job for another builder BUT then they are obliged to give a warranty.