Assessable IncomeATOAustralian Taxation OfficeInterestInterest DeductionsRental Properties

The ATO is Looking at Interest!

Have you ever woken up in the morning thinking that it was going to be a great day and then you get a letter from the Australian Taxation Office?  In particular, the letter is in regards to interest deductions where an individual had purchased land for the development of a unit complex and derivation of rental income.

The Australian Taxation Office’s Taxation Ruling on interest deduction states “Deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities”.  Helpfully this ruling is only 18 pages long and quickly sets out the main points and, after setting these out in easy to understand terms, starts to explain the matter in depth for each of the four points below:

  • Deductions for interest
  • Can interest be capital
  • Interest incurred prior to assessable income
  • Interest incurred after assessable income

The Australian Taxation Office is currently reviewing individual tax returns for the 2016 financial year.  In particular, properties which have large losses from interest expenses and no or little income.

Currently investigations seem to be happening where the Australian Taxation Office has identified continued large and long term losses from investments held by individuals.  So far, the Australian Taxation Office’s focus is on interest incurred prior to assessable income because the units have not been constructed within a three year time period, without consideration of local conditions in the economy and lending positions.

The second situation is a rural parcel of land treated as a rental property, deemed to be non-commercial in purpose after review by the Australian Taxation Office, because the property is used for agistment purposes and drought conditions have resulted in significantly lower income for several years.  The Australian Taxation Office has denied deductions for interest and all other expenses limiting the deductions to the amount of income derived.

The Australian Taxation Office has a mandate to ensure that these matters are investigated and that government revenue is not misappropriated by taxpayers incorrectly making claims for deductions to which they are not entitled.  The concern is that, where taxpayers make decisions based upon information that they are aware of, how time can affect matters and change the nature of interest from being deductible to being treated as capital due to the length of time between the initial purchase and the final construction of the investment or when the Australian Taxation Office conduct the audit.

The taxation treatment of losses from rental properties and the Australian Taxation Office’s focus on these matters, particularly where the land is held for more than three years, can be complex.  If you have any concerns from these types of transactions, please do not hesitate to contact us.


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