Join Australia's most dynamic and respected property investment community

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

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

  1. Ravi

    Ravi Active Member

    Joined:
    31st Jul, 2015
    Posts:
    40
    Location:
    Sydney
    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 Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,045
    Location:
    Sydney
    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

    Joined:
    14th Jun, 2015
    Posts:
    1,175
    Location:
    Gold Coast
    Typically yes

    Steele v ATO

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

    ta

    rolf
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,400
    Location:
    Sydney
    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. Ravi

    Ravi Active Member

    Joined:
    31st Jul, 2015
    Posts:
    40
    Location:
    Sydney
    @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@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,400
    Location:
    Sydney
    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.
     
    Colin Rice likes this.
  7. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

    Joined:
    9th Jul, 2015
    Posts:
    1,083
    Location:
    Perth
    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

    Joined:
    14th Jun, 2015
    Posts:
    1,175
    Location:
    Gold Coast
    So can I have PPOR rates please Mr Bank :)

    ta
    rolf
     
  9. DaveM

    DaveM Adelaide Buyers Agent & KFC Strategist Business Member

    Joined:
    14th Jun, 2015
    Posts:
    2,124
    Location:
    Sydney & Adelaide
    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.
     
    MikeLivingTheDream likes this.
  10. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

    Joined:
    9th Jul, 2015
    Posts:
    1,083
    Location:
    Perth
    Yes you can sir, until the IP is constructed :)
     
  11. John Bone

    John Bone Well-Known Member

    Joined:
    9th Feb, 2016
    Posts:
    62
    Location:
    Melbourne
    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

    Joined:
    16th Oct, 2015
    Posts:
    168
    Location:
    Melbourne
    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
     
    Paul@PFI, MikeLivingTheDream and York like this.
  13. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

    Joined:
    24th Jun, 2015
    Posts:
    227
    Location:
    Philippines

    that is incorrect.
     
  14. sanj

    sanj Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,158
    Location:
    Perth
    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@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,400
    Location:
    Sydney
    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.
     
    Susan and sanj like this.