Costs incurred for the payment of rates on a vacant block of land

Is a deduction available for rates paid on a vacant block of land used as collateral for a loan used to purchase investment property?

No. A deduction for costs incurred for the payment of rates on a vacant block of land is not available under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as the cost is not directly related to the gaining of assessable income from the investment property.

The taxpayer owned a vacant block of land for a number of years. This block does not produce assessable income. The taxpayer subsequently purchased an investment property and used the vacant block as collateral for the loan used to purchase the investment property. Without using the vacant block of land the taxpayer would not have been able to purchase the investment property. The rates on the vacant land were paid in full.

Section 8-1 of the ITAA 1997 provides that expenditure will generally be deductible if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce assessable income, provided that the expenditure is not of a capital, private or domestic nature.

The rates paid on the vacant block of land are not incidental and relevant to the gaining of income on the investment property. The necessary connection between the payment of the rates on the vacant block of land and the gaining of income from the investment property does not exist. Thus, no deduction can be claimed for the rates on the vacant block of land.