Costs during construction

Discussion in 'Accounting & Tax' started by aussieshorter, 8th Jul, 2015.

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  1. aussieshorter

    aussieshorter Well-Known Member

    29th Jun, 2015
    Plenty of tax questions being asked, given it's that time of year! So here's another to add to the pile.

    Disclaimer - Yes, I will be getting specific advice from my tax accountant, but having a little knowledge beforehand can't hurt!

    I purchased a property in November 2014, which had a completely run-down house on a corner block. The house was unlivable, so no rental income. We received conditional development approval to do a major renovation on the property, and eventually subdivide the block and build a new house on that newly created block (sub-division not yet finalised, nor has construction started on the new house).

    As at 30 June 2015 the renovation of the existing house was approximately 85% complete, so still not available for rent. In the time that I've owned the property, we've incurred costs (outside of those covered by finance) in relation to:
    • Interest on original purchase
    • Interest on construction loan
    • Rates and water bills
    • Insurance
    • DA costs (including design fees, council DA fee, surveyors, town planning, soil testing)
    • Sub-division costs (e.g. QUU water and sewerage connection fees)
    • Costs relating to construction (e.g. temporary fence and toilet hire, skip bins, construction drawings, building certification, tree removal, etc.)
    My question is, which of these expenses are deductible in FY15, given the property has not been available for rent? I have looked briefly at the outcome of Steele v. FC of T and understand that interest may be deductible, on money borrrowed to purchase land intended to be developed. What about the other costs?

    And a follow up question - does the answer change based on the intention for property (i.e. intention to sell vs rent upon completion)?
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

    18th Jun, 2015
    For tax purposes I doubt its a renovation but more akin to a reconstruction. It may actually be classified as new residential housing and be subject to GST if its sold.

    If you intend to rent it then there may be a deduction available for interest under the Steele's principles. But otherwise costs may be CGT cost base issues.

    If you propose to sell then Steeles wont apply. Just questioning this issue may be sufficient to pose a concern. ATO are more than happy to look at your DA application and finance etc and consider your intent from those records. As you said, specific tax advice is important as GST, tax and other matters will all affect each other.