Tax treatment of holding costs incurred prior to and during construction of a rental property
Assuming none of the S.26-102 exceptions below apply (e.g., such as one of the ‘carrying on a business’ exceptions) otherwise deductible holding costs such as interest, rates, land tax and maintenance costs incurred from the 2020 income year will not be deductible prior to and during the construction (or substantial renovation) of a rental property.
1. Construction or substantial renovation of a residential rental property
Where the building being constructed (or substantially renovated) on the taxpayer’s land is a residential rental property, deductions for holding costs will be denied until:
- the construction is complete.
- approval has been granted to occupy the property; and
- the property is either leased, hired or licenced, or available for lease, hire or licence (i.e., the property is either rented or available for rent). Refer to S.26-102(4).
Where the rental property being constructed is a commercial rental property, deductions for holding costs will be denied until an eligible substantial and permanent structure is “in use or available for use” on the land. Refer to S.26-102(1).
Note, commercial rental properties are not subject to the legislative extension of ‘vacant land’ (under S.26-102(4)) that applies to newly constructed or substantially renovated residential rental properties (which require the property to be constructed, legally able to be occupied and either rented, or available for rent).
As to when a property is “in use or available for use” is a somewhat more subjective test than the additional requirements that apply for constructed (or substantially renovated) residential premises. In this regard, the ATO clarifies as to exactly when a commercial rental property would be considered “in use or available for use”, so that S.26-102 would not deny holding cost deductions.
In offering their preliminary views on this matter, the ATO indicated that a taxpayer constructing a commercial rental property should be in a position to claim holding costs incurred once an occupancy certificate (or something similar) has been issued. This is primarily because at this time, the property would be capable of being used, and therefore be considered to be “available for use”. Again, the ATO is currently in the process of developing further public guidance on this issue.
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