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Timing of deductions

Discussion in 'Accounting & Tax' started by Excalibur1, 30th Jun, 2015.

  1. Excalibur1

    Excalibur1 Well-Known Member

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    Hi All,

    Can someone please clarify when I can start deducting interest on the loan?

    I have recently purchased a house with a large block and plan on building granny flat at the back. Settlement will be on 23 July. We would like to build granny flat straight away. During that time we wont have a tenant in the property. All together around 2 months.

    I just want to see if we can deduct interest on the loan from the moment we settle or does that start when the tenant is in the property?

    Cheers
     
  2. No Probs

    No Probs Well-Known Member

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    Starts when the property becomes available to rent, so after the granny flat is built unless you decide to rent out the house during construction of the granny flat.
     
  3. Excalibur1

    Excalibur1 Well-Known Member

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    Thanks for quick reply. Appreciate that.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I would say probably on 23 July.
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    For a new construct IP it may be deductible from day one of draw down to meet construction costs where the intent is to make the completed property available to rent (Steele's case)...

    However that decision isn't anything like the issue of a GF build. I would be hesitant to claim any interest during the GF build for the GF land etc and apportioning may be a difficulty in any case. The 2 months for the original loan for the IP doesn't sit with Steeles and should start when IP is avail for rent. So 2 months as a CGT cost base element.

    One of the ironies of Steele's is that its about intent for building not for ownership. One person buys with intent to reno and rent it and other buys with intent to build. Both have different deduction outcomes.

    The GF construct costs may have a small interest cost for the construction to claim from day 1 on Steele's principles. Very small.
     
    Last edited: 1st Jul, 2015
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I must say I would be surprised if Paul's position was correct.

    Based on the Steele case I would say the interest would probably be deductible against income (s8-1) from the date it is incurred as long as the intention is to construct an income producing property and there are continuing efforts to do this and there is no private purpose such as residing there.
     
  7. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Steele's case has a catch. It is a test case but a bad example. Many don't agree with the decision incl the ATO but they didn't appeal it. Its not a very good example to follow and the ATO adopt a very strict view under self assessment on it. Unless I hold a private ruling I seek to defer the deduction rather than get it wrong and client smacked with penalties. I have been unsuccessful in seeking a private ruling many times that applies the Steele principles. Its hard to meet all the criteria. Steeles was not about a passive investor is the first issue so a incurred basis may be very different for a passive investor v's one who has a expectation of deriving income from a business / venture. That's what the ATO seem to say in the decisions. Steeles decision was more about matching costs incurred against income in different tax periods that it was about interest. Strange aspect of the case was nobody argued any costs other than interest and nobody has tried since. I think they havent as its a risk for a different decision even overturned if full bench of Federal Court hears it. I may be wrong on that and not a tax Barrister. I know one who said that to me...Not my idea I will admit. The ATO own software checking does not allow a rental schedule to have zero income and any deductions. This does defy the decision in Steele's too

    I would willingly agree Terry but its a potential PI issue to run in and assume Steels decision is set in stone.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes I agree that Steele is not a good example as it is a very unusual case.

    I am not an accountant and you may be correct, but I just did a quick search on the PBR register. Although a private binding ruling is only binding on the person who applied for it, it is a good way to find out the ATO’s thinking and like of argument.

    =

    Authorisation Number 61534

    ==

    From the outline of the situation it seems in this case there was a considerable delay in the buying of the property and the construction.

    It then goes on to outline the reasons.

    https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/61534.htm
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yes and the ATO generally issue it where the facts are straight forward - Love that word. Intend.
    Until I check client circumstance I adopt the view that Steele's wont apply... IMO its a bit like telling a client a cost is deductible for a repair and then when you see the invoice its not a repair as they told you but a replacement in full. I have had way too many people tell me things that are skewed towards a tax benefit. Nature of the beast in tax.

    I have to be careful here and on old SS that I don't imply that something is automatic and assured when it may need specific issues to be satisfied and maybe advice. In the OP the question about interest was about a property already constructed with a issue of a new build GF thrown in. I don't think that sits with Steele's decision and with insufficient info I wouldn't be claiming interest until available for rent. For a full new build IP sure go for it and is very common where clients build duplexes / villas to keep and rent. The interest on borrowed funds for the GF (only) may sit with Steele's.

    Just looked at my earlier post and it wasn't well worded to differentiate between the OP and general cases where Steeles is safe.
     
  10. Excalibur1

    Excalibur1 Well-Known Member

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    I'm really glad I joined this forum!

    Thanks for your input Paul and Terry. Very informative. I would be better getting in a tenant int the existing house and then proceed to build the GF. I will fence off the building site so it will have its own driveway and in no way it should interrupt the tenants. This will make the interest deductible straight away.

    Thanks!
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yes.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not necessarily (= I love to disagree with Paul).

    If tenants only have access to part of the land then the other part is not income producing so you may have to apportion!

    You need specific advice. The interest is possibly deductible in full without a tenant.
     
  13. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    Temeli v fct hasnt even got a mention. Steeles case and its implications was considered in that case as well.


    36. The last of those conditions requires that continuing efforts are undertaken in pursuit of assessable income. This condition received no attention from the majority, and consideration of this matter is to be found in the reasons of Callinan J. We have concluded that the concept of 'continuing efforts' should not be taken to require constant on-site development activity. The comments of Callinan J indicate that a test of 'continuing efforts' would need to be set within the context of the normal time frames of the relevant industry. However, if a venture becomes truly dormant and the holding of the asset is passive, relevant interest will not be deductible even if there is an intention to revive that venture some time in the future. This is consistent with Inglis v. FC of T 80 ATC 4001; (1979) 10 ATR 493 (see Brennan J at ATC 4004; ATR 496, except for the comments about interest deductions being capital which must now be considered incorrect, and Davies J at ATC 4008; ATR 500). Inglis is a case cited with approval by the majority, although in a slightly different context ( Steele 99 ATC 4242 at 4251; (1999) 41 ATR 139 at 151).
     
  14. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yes but how much of the original loan relates to the acquisition of the land under the GF and access paths etc ??

    One of the difficulties with a GF is determining that basis of apportioning. If the cost for the GF does not comprise a separate CGT asset (s108-70 since ATO website is offline) the GF may just be like a shed and not need apportioning.
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    All the more to support my argument I think.

    but Temeli v FCT was in 1997 prior to the HC case of Steele in 1999
     
  16. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Temeli and the recent AAT position of developer in QLD who acquired a old house intending to go into a JV with builder who owned neighbouring IP (who didn't proceed with dev JV) and Steele all seem at odds. All different facts...AAT in the recent appeal (? will try find) considered original intent couldn't be altered and so held there was no CGT issue and profit was on revenue despite change of intent to hold and produce assessable income (rent). Temeli takes a different approach and considers constant review of efforts seem connected with intent.

    Of course the issues are different.