ATO Interpretative Decision

ATO ID 2002/764

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest expenses incurred from 1 July 2001 in relation to a foreign rental property?

Decision

Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for interest expenses incurred from 1 July 2001 in relation to a foreign rental property.

Facts

The taxpayer is an Australian resident.

The taxpayer owns an overseas rental property.

The taxpayer borrowed money to fund the purchase of the rental property.

The taxpayer is assessable on the foreign rental income.

The interest expense on the loan exceeds the rental income from the rental property.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses or 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, or relate to the earning of exempt income.

Paragraph 8-1(2)(d) of the ITAA 1997 provides that a deduction will not be allowed where another provision of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997 prevents it.

Section 79D of the ITAA 1936 provides that where a taxpayer incurs deductions in relation to a class of assessable foreign income, and the amount of those deductions exceeds the amount of foreign assessable income of that class, then the deductions allowed are limited to the amount of income received. Any excess deductions create a foreign loss which is not deductible against income of other classes or from domestic assessable income (ATOID 2002/177). This is referred to as foreign loss quarantining. Such quarantined foreign losses may be offset against income of the same class in a later income year.

For income years commencing on or after 1 July 2001, debt deductions are no longer subject to foreign loss quarantining. The definition of 'foreign income deduction', to which the foreign loss quarantining provisions apply, now excludes debt deductions to the extent they are not attributable to any overseas permanent establishment of the taxpayer (subsection 160AFD(9) of the ITAA 1936).

'Debt deductions' are, broadly, deductible costs incurred in obtaining and maintaining debt finance (section 820-40 of the ITAA 1997). Examples of debt deductions include interest, amounts in the nature of interest and fees, such as loan establishment fees and draw down fees, in respect of debt.

As debt deductions are no longer included in the definition of 'foreign income deduction' for income years commencing on or after 1 July 2001, the calculation of net foreign income (that is, foreign income less deductions) is no longer reduced by debt deductions to the extent that those debt deductions are not attributable to an overseas permanent establishment of the taxpayer.

The interest expense incurred by the taxpayer after 1 July 2001 is a debt deduction and the full amount is allowable as a deduction under section 8-1 of the ITAA 1997 against total assessable income of the taxpayer.

Year of income:  Year ending 30 June 2002 Year ending 30 June 2003 Year ending 30 June 2004 Year ending 30 June 2005 Year ending 30 June 2006 Year ending 30 June 2007 Year ending 30 June 2008

Legislative References:
Income Tax Assessment Act 1936
   section 79D
   subsection 160AFD(9)

Related ATO Interpretative Decisions
ATO ID 2002/177

Other References:
Changes to foreign loss quarantining and foreign tax credit calculation rules - fact sheet

Keywords
Foreign income deductions
Rental property income
Rental property loan interest expenses
Rental expenses
Rental property

Business Line:  Small Business/Individual Taxpayers

Date of publication:  31 July 2002

ISSN: 1445-2782