Interest, rates, water, etc during renovation

Hi All,
I have an investment property I've just renovated. The renovation took long time, so I could't rent it out. This is a property held in a discretionary trust.
I already have the total amount of the renovation cost.
The question is:
The expenses incurred during the renovation (Interest on loan, rates, water, etc) are considered as part of the renovation or should I claim it when I sell?
I believe that as theses expenses are not included when I calculate the total cost of the renovation, therefore, I cannot claim it as depreciation but yes when I sell the property.

Is this correct?
Thanks in advance

 

The holding costs could possibly be claimed against the income of the trust.

 

It would depend on the nature of the renovation. Many alternatives and specific advice may assist

- Initial repairs ?
- Was property prev tenanted and some (maybe not all) of the costs are repair related AND capable of being identified
- Tenancy type repairs v's capital works / depreciable item?
- Plan to rent or sell ?

If the plan is to rent the property its likely some costs may be non-deductible but could add to the depreciation and cap allowance report and maximise deductions over time.

 

1) property was not rented previously
2) the intention is to hold it as a rental property for 2 or 3 years and then sell it
3) the renovation was capital works rather than maintenance/repairs

As I mentioned, the property during renovation wasn't advertised for rent, so my understanding is that I cannot claim any deduction against future income of the trust.

Therefore, holding costs are included or not as part of the renovation cost?
Or i just keep these figures and I claim them when I sell?

 

Seems like its capital in nature. Nil deductible but some may be eligible for costbase or depreciation (technically all add to costbase but the depreciation can still be deductible that reduces the costbase). QS may incorporate this into report and determine which is which. If you arent doing a QS report accountant may be able to sort otherwise. You will need summary of costs broken down and date property is first rented.

 

Some costs may still be deductible until the property is rented. Ownership costs may be deductible in one of two ways (or even both by apportionment). D15 Steeles deduction and Rental schedule.

 

its rare but i disagree with @Paul@PFI on this one.

I think the expenses will be deductible based on those limited facts you put above re renting it for 2 or 3 years

In Steele's Case, the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. It follows from the finding in Steele's Case that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income if:

• the interest is not incurred 'too soon', is not preliminary to the income earning activities, and is not a prelude to those activities;

• the interest is not private or domestic;

• the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost;

• the interest is incurred with one end in view, the gaining or producing of assessable income, and'
• continuing efforts are undertaken in pursuit of that end.

In Ormiston v. FC of T 2005 ATC 2340 (Ormiston's Case) a deduction for interest and other expenses was allowed in respect of the property even though the property had still not produced any income after nearly five years. However, it was shown that the taxpayer had identified what needed to be done at the outset and over the whole period had made continued efforts in pursuit of the property becoming income producing.

The decision in Ormiston v FCT is also a good factual precedent (taxpayer ended up selling the rental property without it ever producing rental income and yet deductions were allowed under s 8-1)

Your circumstances appear similar to those in Ormiston's Case and it was considered that the interest and holding expenses incurred were allowable deductions in terms of section 8-1 of the ITAA 1997.

the key is had made continued efforts in pursuit of the property becoming income producing

 

Sorry, I made a mistake when I clarified.
1) The property was rented for a short time (5 months) and then did the renovation that took 7 months.
2) the intention is to hold it as a rental property for 2 or 3 years and then sell it
3) the renovation was capital works rather than maintenance/repairs

As I mentioned, the property during renovation wasn't advertised for rent, so my understanding is that I cannot claim any deduction against future income of the trust.

Therefore, holding costs are included or not as part of the renovation cost?
Or i just keep these figures and I claim them when I sell?

Sorry about this confusion

 

This indicates that continuing activity, aimed at eventually producing assessable income is required if the costs of holding a property with the idea of later producing income from it are to be deductible.

Ormiston's Case. In that case, deductions for interest and other expenses were allowed for a property that was still not income producing after nearly five years. However, it was shown that the taxpayer had over the whole period made continued efforts in pursuit of the property being income producing. While the AAT had some difficulty understanding the time delay, they found in favour of the taxpayer on the basis that they could not find what other purpose the taxpayer would have had in borrowing the money and incurring substantial interest and other costs as well as the substantial investment of the taxpayer's time and work.

 

[QUOTE="Bernelle, post: 493019, member: 12774"

As I mentioned, the property during renovation wasn't advertised for rent, so my understanding is that I cannot claim any deduction against future income of the trust.

Sorry about this confusion[/QUOTE]

i dont agree based on Steele v FCT, Ormiston v FCT and TR 2004/4

HOWEVER a mere intention to make a property available for rent is not sufficient for the property to be taken to be genuinely available for rent. Bonaccordo v FCT held that as insuffficent steps had been taken to make the property available for rent then the interest and other holding costs were not deductible.

If you took 7 months to do a renovation and during that time took all reasonable steps to complete the renovation why would the costs not be deductible ?

 

I'm interested in what "other expenses" means in this scenario. I'm currently claiming only interest based on Steele/Ormiston, are all holding costs claimable? E.g Land Tax, Rates, Water etc.

 

In ormiston it was concluded that also rates, land tax, insurance and water rates were deductible.

Ormiston and Commissioner of Taxation [2005] AATA 978; (2005) 60 ATR 1277; 2005 ATC 2340 (5 October 2005)

 

i dont agree based on Steele v FCT, Ormiston v FCT and TR 2004/4

HOWEVER a mere intention to make a property available for rent is not sufficient for the property to be taken to be genuinely available for rent. Bonaccordo v FCT held that as insuffficent steps had been taken to make the property available for rent then the interest and other holding costs were not deductible.

If you took 7 months to do a renovation and during that time took all reasonable steps to complete the renovation why would the costs not be deductible ?[/QUOTE]

I believe all holding costs in my case are deductable. The question is when I should be claim them:
1) when I sell the property
Or
2) during the year the expenses were incurred (even though I did rent the property and it was not available for rent because it was under renovation)

 

2

 

I agree 100% with Mike. I'm not sure why we may disgaree. I said costs appear deduictible in one of two ways. My only concern would be if the intended use of the property to produce future rents ended. That didnt appear a issue.. The taxpayer had full intention of renting on completion

 

I am in a similar case but all renovation was done immediately after settlement. It took long time but I could rent it 1 month prior the end of the financial year.
Also in a trust and intend to have it rented for at least 3 years and then sell.
I do understand that all renovation cost are capital in nature and will be considered as a costbase when I sell.
In relation to holding costs, when I can claim them?
1) During its financial year
or
2) When I sell?

Thanks.
F.

 

See above - answered clearly.

If the trustee intents to rent the property out these expenses could be deductible against the trust income

 

@Paul@PFI sorry mate realised you were talking about the repairs and renovations. All good.