ATO Interpretative Decision

ATO ID 2002/817

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 loan interest expenses where the original purpose of the loan was private, but now has mixed income and non-income producing purposes?

Decision

Yes. A deduction is allowable under section 8-1 of the ITAA 1997 to the extent that the loan interest expenses were incurred in earning assessable income.

Facts

The taxpayer took out a conventional loan to finance the purchase of their main residence.

The taxpayer later refinanced the loan with a line of credit.

The taxpayer's salary was deposited into the account and they drew money out of the account for living expenses.

The taxpayer ceased using the property as their main residence and made it available for rent.

The taxpayer received rental income from this property.

Consequently, the loan has mixed income producing and non-income producing purposes.

The taxpayer incurred interest expenses on the line of credit.

Reasons for Decision

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, or relate to the earning of exempt income.

The loan was originally set up to re-finance the loan used to purchase their primary place of residence. As such, the interest expenses incurred would not have been deductible under section 8-1 of the ITAA 1997. However, from the time the property was tenanted, some portion of the interest incurred on the amount outstanding on the property would be an allowable deduction against the income generated.

Taxation Ruling TR 2000/2 stipulates that interest accrued on a line of credit used for mixed purposes needs to be apportioned.

In order to do this, the taxpayer must establish what portion of the loan is attributable to the property at the time it becomes income producing. This is achieved by making a notional calculation of the line of credit as if it was used for the mixed purpose from its inception.

As such, all repayments made from the date that the line of credit was established until the date the property became income producing must be notionally apportioned in accordance with paragraphs 44-46 of TR 2000/2. This will establish the loan balance applicable to the property as at the date it becomes income producing.

The interest deduction can then be calculated for the rental property in accordance with TR 2000/2 and a deduction will be allowable under section 8-1 of the ITAA 1997.

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Related Public Rulings (including Determinations)
Taxation Ruling TR 2000/2

Keywords
Interest expenses
Rental property loan interest expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  22 August 2002

ISSN: 1445-2782