Tax Tip 187: Changing your mind on off the plan/Construction and deductibility of interest

Changing your mind on off the plan/Construction and deductibility of interest

Sometimes a change in intention can result in a different tax outcome.


Interest on loans used to pay for construction of investment properties or purchase investment properties off the plan can be deductible (until the new law comes in 1 July 2019).


I have found an old private binding ruling which shows that one person was able to convince the ATO that they had changed their mind mid way through construction on what was to be a main residence with the ATO allowing the interest to be deductible from that point onwards.


In this PBR the owner constructed a home with the intention to live in it. There were delays and they established another main residence elsewhere and decided to rent the first property out – but had not found tenants at the time of the PBR. The ATO allowed the deductions from the date they changed their intentions and before the settlement:

PBR Authorisation Number: 51959
Legal Database

“... Your intentions in developing the property

You developed a house and land package with the intention of establishing a private residence. You later changed your intention and decided to make the property available for rental upon completion of the property. The circumstances around the development of the property are not considered to be in breach of the guiding principles established in TR 2004/4.

Question 3

Therefore you are entitled to a deduction for your proportion of the interest incurred on the house and land package borrowing, from the date you decided to use the property in the future as a rental investment property...”


And don’t forget if you cannot claim the interest against income you can use the interest to reduce the CGT later on with the sale (for now).

 

Sounds deductible under the principles from Steele's case.

From 1 July 2019 this may well change under the proposed Budget changes where the Government says it will deny deductions for all expenses associated with holding vacant land.

According to the Budget papers: “This measure will not apply to expenses associated with holding land that are incurred after:

(i) a property has been constructed on the land, it has received approval to be occupied and is available for rent; or
(ii) the land is being used by the owner to carry on a business, including a business of primary production.

Interest deductions denied can form part of the CGT cost base, which means that we have a category of interest on capital account

 

The amendment periods can also impact. If deductions were claimed and cannot be amended then the costs cannot add to the costbase

In a recent example the taxpayer could not amend even if they wished. The profit on sale was enhanced by the inability to claim the interest in the costbase. The profit on sale was enhanced...a timing issue.

 

Interest on land and construction now generally no longer deductible because of s26-102 ITAA97 which was introduced in 2019
INCOME TAX ASSESSMENT ACT 1997 - SECT 26.102 Expenses associated with holding vacant land

Note that this section doesn't apply to companies holding land