Interest deductions prior to sale

Discussion in 'Accounting & Tax' started by dayv85, 24th Jul, 2017.

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  1. dayv85

    dayv85 Member

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    Curious what the position would be in relation to interest deductions in circumstances where property was used to produce rental income, but the lease was terminated in order to sell the property with vacant possession?

    ATO/other guidance makes it clear that where you stop renting and move into the property the interest stops being deductible (private use) but it is also clear that if you sell the property but there is a shortfall in the sale price and you continue to pay interest charges after the sale, they remain deductible.

    What about the period between tenants vacating and the date of sale? My view is that it is in the same category as the latter example above, because the character of the borrowing hasn't changed to being private, the purpose of the borrowing was still to produce assessable rental income, but just wanted to test if anyone had a view/supporting materials for a position either way?
     
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Deductible, The inverse to Steeles decision.
    Provided the property remains available. Without great effort !
     
  3. dayv85

    dayv85 Member

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    Thanks for the quick reply Paul.

    By available do you mean available to rent? Just wanted to clarify because in the scenario I'm thinking of, the landlord would be terminating the lease at the point they were intending to sell the property so that they could sell it with vacant possession, meaning it would no longer be available for rent.
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Personal tax advice is my suggestion. Fiddling with tax laws comes with consequences and can be punitive. Smart ideas arent always.

    Selling a property ex tenancy means its not available for rent. The vendors tax deductions would cease. The consequence is a loss of 50% of the deduction when its a CGT cost IF a resident
     
  5. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    I would say it is not deductible, but it would depend on the circumstances. Could be used in the cost base calcs
     
  6. dayv85

    dayv85 Member

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    Thanks both.

    What about paragraphs 10-14 of TR 2004/4, namely:
    • the interest is incurred during a period after the relevant income earning activities have ceased, however the outgoing may still be incurred in gaining or producing the assessable income because the occasion of the outgoing is found in whatever was productive of assessable income of an earlier period (ie the loan and obligation to pay interest only exists because the borrowing was for an assessable purpose) - see [10]
    • the loan is not being kept on foot for reasons unassociated with the former income earning activities - only in the intervening period until the previously income producing property can be sold - see [13]
    • the reason for the loan being kept on foot is an economic inability to repay it (until the property is sold and proceeds are available), suggesting the loan has not been kept on foot for purposes other than the former income earning activities - see [14]
     
  7. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    How long a period are we talking about?
     
  8. dayv85

    dayv85 Member

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    Say 2 months from vacation to sale, and then the standard 6 week settlement
     
  9. Paul@PFI

    [email protected]I Tax Accounting + SMSF Business Plus Member

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    Read my above post. First sentance.
     
  10. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Why is it vacant?
     
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  11. dayv85

    dayv85 Member

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    In case anyone else is wondering the answer to this question, it seems the ATO shares your view Paul. See Private Binding Ruling 1012129758027 at RBA Content

    "When you decided to put the property up for sale your intentions changed from earning assessable income to that of holding the property. You are therefore not allowed a deduction from this time."
     
  12. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Paul had the opposite view.

    Keep in mind that these PBRs only apply to the applicant's and you could probably find one saying that the interest is deductible.
     
  13. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    My view is same as ATOs...What did I say elsewhere ? :eek:

    If its a few days the nexus to income production isnt a serious concern. Its when the property is made vacant for explicit purpose of vacancy and renos and then sale....There can even be a grey area if the tenant chooses to vacate due to a for sale board.

    In those instances the nexus to income ceases when the tenancy ends whre the property is made vacant for the purposes of sale.

    I see the key issue and making alternations and pre-sale improvements. But they must be more than mere repairs allowed to be made after tenancy ends. This means the property is then held for capital production purposes

    Personal tax advice at times is needed