Claiming pre-purchase expenses
Q: Further to your last article regarding ‘Claiming pre-purchase expenses’, I am currently building a new investment property and paying bank interest on the loan while it’s under construction. Am I able to claim the accumulated bank interest (until the building is completed) against the rent income that I will be receiving in the same fi nancial year?
A: As long as your intention and purpose when building the new investment property is to derive assessable income (rent) from it when construction is completed within a reasonable timeframe, then the bank interest on the loan is tax deductible while the property is under construction.
Under Taxation Ruling 2004/4, whereby interest may be claimed for a period prior to rent being received, the ATO accepts that interest incurred during a period prior to the derivation of relevant assessable income will be “incurred in gaining or producing the assessable income” in the following circumstances:
- The interest is not preliminary to the income-earning activities;
- The interest is not private or domestic;
- The period of interest outgoings before the derivation of assessable income is not so long that the necessary connection between the 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.
This therefore means that, provided the ATO is satisfi ed that the above conditions have been met, a tax deduction for interest expenses incurred can be claimed before rental income is derived where, for example, the investment property is being constructed and/or undergoing construction for income-producing purposes.
It is very important that the intention must always be and continues to exist for the generation of assessable income at all times, where the nexus between the interest expense incurred and the intention of deriving assessable income (rent) must not be broken, even though at the time there is no assessable income derived.
Claiming ‘legitimate’ expenses
Q: What can I claim as an investment-related expense? I’ve enrolled in a couple of online courses on how to make money, and also on a personal development course. Can I claim these as legitimate expenses? Obviously I don’t want to get in trouble with the ATO.
A: Generally, an income tax deduction for investmentrelated expenses incurred must have a direct connection to the generation of existing assessable income. For example, if you have incurred an expense that is related to your investment property, then to be able to claim this as an income tax deduction you must have already owned the property before incurring the expense (in this case the cost of the property investment course/seminar), and you must also already be generating assessable income. In other words, if the expense is incurred to generate assessable income, then you can claim the expense as a deduction against that income as there is a direct nexus.
There will be no income tax deduction if, for example, the expense is capital in nature (incurred prior to assessable income being generated or prior to the property being acquired), or is not related to generating assessable income.
Expenses incurred such as increasing rental revenue, reducing rental expenses, selecting better tenants, and selecting better managing agents are generally allowable income tax deductions.
Expenses such as carrying out renovations/improvements, acquiring the property, buyer’s advocates fees, and improving wealth are all capital in nature and are therefore not tax deductible.
Without specifi c details on the online course you have enrolled in on how to make money, this seems to be capital in nature and therefore most likely will not be allowed as an income tax deduction. Similarly, a course/seminar that advises you on how to acquire an investment property or shares is also not tax deductible.
If the course/seminar providers claim otherwise, request their ATO Product Ruling details outlining the clauses and references to the income tax deductibility; or, alternatively, you may even be required to obtain an ATO Private Ruling if you believe that you may be entitled to an income tax deduction prior to claiming such investment expenses. With regard to your personal development course, again, without specifi c details, this too seems to be capital in nature and therefore not an allowable income tax deduction.
Repair or upgrade?
Q: "I’ve just replaced my gas water heater after my tenants complained there was no hot water in my rental property. I sent a plumber and was told the unit was essentially dead. Can I claim this as a repair cost?
A: Repairs generally involve the replacement or renewal of a worn-out or broken part, for example replacement of part of a fence damaged by a falling tree branch. Repairs are tax deductible for income tax purposes.
Improvements and replacements of part of your property in its entirety are capital in nature and therefore not tax deductible (for example, if you replace all the fencing on a property, or replace a kitchen with a new one, or replace an entire structure or unit of property, such as a stove). Usually, improvements and replacements, however, can be depreciated on an annual basis.
In your case, you have replaced your gas water heater in its entirety, and this therefore cannot be claimed as an immediate income tax deduction. However, the cost of the gas hot water unit, plus incidental costs such as the plumber’s services and labour, can be depreciated on an annual basis.
The tax experts
Shukri Barbara is a CPA, CTA and principal advisor at Property Tax Specialists, with over 30 years’ experience in public practice, specialising in property tax, ownership structures, asset protection, (legally) minimising tax, and cash flow analysis
Angelo Panagopoulos is principal at Hamilton Reid Chartered Accountants, specialising in property and taxation, asset protection and ownership structures.
Disclaimer
The views provided are of a general nature only and should be considered as general education. Readers should not act on the information above without obtaining professional advice relevant to their circumstances. The article is intended as information only.
