Tax Tip 531: Claiming Costs on an Investment Property When Vacant Long Term

It may still be possible to claim interest and other expenses incurred in relation to an investment property where the property is vacant. The period of vacancy can be short or it might be long. In a recent case the taxpayer’s property was left vacant for over 5 years, DiStefano v FCT [2023] AATA 1697

The key to being able to claim deductions while vacant is the taxpayer maintaining a connection between the expenses and the production of assessable income.

In this case, the ATO allowed deductions for a few years, but then denied any further deductions.

The issue was whether the expenses could be said to be “incurred in gaining or producing assessable income”.

The Tribunal said, at paragraph 35 and 36:


“35. When we have regard to all the circumstances, we are satisfied Mr DiStefano had done just enough to demonstrate he retained his commitment in the relevant year to the project that would ultimately yield assessable income (or, perhaps more accurately, his behaviour did not demonstrate he had at that point lost his commitment to that end).”


“36. In short, we are not satisfied the slow progress towards realising the project – and the lull in activity between February 2016 and 30 June 2017 in particular – suggest a want of commitment given the activities the taxpayer had been undertaking and the evident purpose of the original investment. It follows the nexus between the outgoings and the production of assessable income remained. We accept the delay in execution of the project could become untenable at some point: at such a point, the taxpayer would no longer be said to incurring outgoings in gaining or producing assessable income. But the taxpayer had not reached that point in the 2017 year of income. Whether he would succeed in making the same argument in subsequent years of income remains to be seen.”

 

Appeals often provide poor guidance when timing entry is ignored

 

Timing entry?

 

The timing on when a property becomes a investment property available for rent and its intended use can affect some deductions. Not uncommon to find people buy a property with one intention then it changes before its even occupied by anyone. eg Have been told by some it was intended to purchase an investment use property. I did some renos then decided to live in it. Steele's principles which may consider the holding costs etc as deductible then dont apply. You cant change intentions and expect to meet the steele's principles. Well you can but who will believe it ?

Vacancy duration can expose risks. But can also be supported. Saw many with sound intentions have this fail for long periods due to lockdowns etc. Its often best when intentions are completed rather than change. Saw a person fail when the ATO asked if the taxpayer applied for a land tax exemption for a PPOPR intented to be constructed. They didnt. They paid a small amount of land tax. ATO argued they would not have done that if intention was to build own home. The broker docs also showed a intention to potentially resell aftre construct.

Timing entry / exit and duration should all be considered where intentions are a basis to support a tax outcome.

 

See also this related thread

Tax Tip 328: Claiming Deductions While a Property is Vacant

 

Case law (Steele' case) and TR 2004/4 on the claiming of ownership costs when a property is undergoing renovation and construction is ordinarily a straight fwd process. However delays and long periods expose taxpayers to concerns that their endeavours are not compliant with the views in that case or that of the Commissioner.

Para 9 of the ruling says...continuing efforts are undertaken in pursuit of that end. This view is from the case decision in Steele. Several conditions are required but this final one is of interest to this thread. The ruling sumamrises that....This condition requires that continuing efforts are undertaken in pursuit of assessable income. This condition received no attention from the majority (HC judges) , 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.

Excuses about lack of funds etc can prove fatal. A private ruling on what if any continuing efforts are occcuring during a period of dormancy may be considered rather than the passage of time itself.

 

I've just come across another case related to this topic

Meakins and Commissioner of Taxation (Taxation) [2023] AATA 3852
Meakins and Commissioner of Taxation (Taxation) [2023] AATA 3852 (17 November 2023)

TAXATION – applications for review of objection decisions – whether assessments excessive or otherwise incorrect – s 14ZZK of Taxation Administration Act 1953 - whether Applicants could claim deductions for property held – whether holding expenses for the property were deductible under s 8.1 of the ITAA 1997 – whether costs incurred in the course of or producing assessable income or the carrying on of a business – whether Applicants had intention to construct something which will produce assessable income – insufficient meaningful action over 17 years to evidence intention – Applicants did not have the requisite degree of commitment to the relevant income producing activity – Steele v DCoT distinguished – whether administrative penalties correctly applied – whether penalties should be remitted in part or in full – reviewable decisions affirmed