Q: We are building an investment property and have already "drawn down" on the construction loan. The home will not be complete and ready to rent out until the end of the year. Can we still claim the interest that has been payable this financial year, as our intention is to rent the property once built? Or can we not claim it yet, because the home is not yet available to rent?
A: The answer is yes - if your plan is to build an investment property with the intention of gaining assessable income (rent), the interest on the construction loan paid by you is tax deductible.
So how do you prove intent? Well, to prove intent, you must have some form of evidence such as rental appraisals from real estate agents, or you could even place the property with an agent to gather expressions of interest from prospective tenants prior to completion.
The interest is only deductible if following are met:
1) The interest is not incurred 'too soon', i.e. before the development has started
2) The interest is not private in nature
3) The period of interest expense prior to the derivation of rental income is not very long, that is, if the necessary connection between interest and rental income is lost;
4) The interest is incurred with one end in view, which is the gaining or producing of assessable income (i.e. you aim to complete the development as soon as possible and rent it out)
5) Continuous efforts are undertaken in completing the development.
There is also a famous court case called Steele's Case, where the Federal Court allows the individual to claim the deductions if he could prove the above points, and he did prove them.
- David Naylor
Ed Chan and David Naylor are the co-founders of Chan & Naylor, an accountancy firm that specialises in the areas of Asset Protection, Wealth Creation through property investing, Estate Planning and Tax Planning. The company ranks in the top BRW 100 Accountancy firms in Australia. For more, phone 02 9391 5400 or visit www.chan-naylor.com.au