Rental Property - timing of deductions

Can the taxpayer claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for rates, mortgage interest and real estate agent fees for a rental property from the date the property is listed for rent with a real estate agent if the property was previously their private residence?

Yes. The taxpayer can claim a deduction under section 8-1 of the ITAA 1997 for rates, mortgage interest and real estate agent fees for a rental property from the date the property is listed for rent with a real estate agent as there is a clear connection with the income producing activities of the taxpayer from that date.

The taxpayer owns their main residence.

The taxpayer is required to relocate interstate for work purposes for a period of two years.

The taxpayer will list their residence with a real estate agent as being available for rent during the time they are away.

The taxpayer will incur rates, mortgage interest and real estate agent fees from the date the property is placed with the real estate agent.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Taxation Ruling TR 2000/17, in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case), concludes that the interest incurred in 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 incurred 'too soon'; that is, it is not preliminary to the income earning activities and is not a prelude to those activities; • The interest is not private or domestic; • The period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost; • The interest is incurred with one end in view, being the gaining or producing of assessable income; and • Continuing efforts are undertaken in pursuit of that end.

While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including rates, mortgage interest and real estate agent fees.

The taxpayer has listed their rental property with a real estate agent. The previous private or domestic purpose of the property (the taxpayer's residence) is replaced by an intention to earn income from the property from the date the property is listed with the real estate agent.

Although there may be a gap between the listing of the property and the actual receipt of income, the expenditure is incurred for the sole purpose of obtaining assessable income from the date the property is listed with the real estate agent. The expenses are not preliminary to the income earning activities, as the property is available for rent at the time the expenses are incurred.

The rates, mortgage interest and real estate agent fees expenses are incurred in gaining or producing assessable income. The taxpayer is therefore entitled to a deduction under section 8-1 of the ITAA 1997 for those expenses incurred from the date the property is listed with a real estate agent.