Post-cessation for interest properties (Rental Properties and Vacant Land)
In some circumstances, the sale proceeds from an income-producing property may not be sufficient to fully pay off the loan which the taxpayer borrowed for acquiring the property; which means the taxpayer will continue to be charged interests on the loan after the sale. Generally, such post-cessation interest is deductible under S.8-1. Refer to FCT v Brown [1999] FCA 721 and TR 2004/4.
S.26-102(1)(b)(ii) ensures that the ability to deduct otherwise deductible post-cessation interest is generally not interrupted, provided an eligible structure was “in use or available for use” just before the taxpayer ceased to hold the land. In other words, otherwise, deductible holding costs will not be denied if the land was not ‘vacant land’ immediately before the taxpayer ceased to hold an interest in the land. In addition, post-cessation interest can be deductible in both a business and a non-business context.
If a rental property was vacant, and not being actively marketed for rental just before the sale of the property, would it be considered “in use or available for use” for S.26-102(1)(b)(ii)?
Yes. According to the ATO, it would be “in use or available for use” to be an eligible substantial and permanent structure regardless of whether it was rented or available for rent at the time of sale or otherwise vacant (yet still can be occupied). Therefore, any ongoing post-cessation interest would continue to be deductible assuming that the requirements of TR 2004/4 are met and the question outlined below is not applicable.
What if the property was residential premises that had been constructed or substantially renovated while the taxpayer held the land?
If the property was constructed or substantially renovated whilst the taxpayer held the land, according to S.26-102(4), the land may prima facie be considered as ‘vacant land’ if the property is provided with vacant possession and was not being actively marketed for rent at the time of sale. This means that deduction for any ongoing otherwise deductible post-cessation interest expense may potentially be denied as the land would be considered vacant just before sale (if the property sold in this case is a commercial premise rather than residential premises, S.26-102(4) would not be applicable and the taxpayer can continue to claim the deduction).
In contrast, a taxpayer who purchased a pre-existing residential rental property (which they did not substantially renovate) would not be denied under S.26-102(4) and continue to claim ongoing post-cessation interest deductions.