Edited version of private ruling

Authorisation Number: 1011478102421

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deductions - overseas travel

Question 1

Are you entitled to a deduction for the cost of accommodation, airfare and travel expenses you will incur to a trip to Country A to purchase a rental property?

Answers

No.

Question 2

Are you entitled to a deduction for interest costs on a loan amount from a redraw facility of an existing loan to the extent to purchase a rental property in Country A?

Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You intend to purchase an apartment for investment in Country A.

You have seen all the relevant plans but would like to travel to Country A to finalise the purchase.

You and your spouse have an existing home loan with redraw facility.

You will redraw on an existing home loan to finance the purchase of a rental property in Country A.

You will be using all the borrowed funds to purchase the investment property.

Your spouse is also travelling with you and will be sharing ownership in the property in Country A.

You are intending to claim the following expenses:

- boarding and lodging

- airfare

- taxi, and

- interest expenses on borrowed funds.

Your investment property will be managed by an agent who will determine the rate of rent which will be paid on a monthly basis.

You will have a landlord and tenant relationship with your tenant.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 8-1

Reasons for decision

Travel expenses - Airfare, accommodation, taxi fares

Section 8-1 of the Income Tax Assessment Act 1997 (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.

In your case you will be travelling to Country A prior to the property being purchased and hence prior to the property being used to produce an assessable income. Therefore, the travel expenses are considered private in nature. It is accepted that travel expenses incurred to inspect or maintain a rental property, or collect the rent may be deductible but this is on the premise that the rental property is income producing at the time the travel is undertaken. Therefore the cost of the proposed travel from Australia to Country A to purchase the rental property will not be an allowable deduction under section 8-1 of the ITAA 1997.

Note

Your travel costs will not form part of the cost base for capital gains tax purposes and hence, cannot be taken into account in calculating any capital gains on disposal of your intended property.

Interest expenses on borrowed money to be used to purchase the investment property

Interest expense incurred on loan of an income producing property is deductible under section 8-1 of the ITAA 1997.

Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The Commissioner considers that a deduction is allowed for the interest on a loan where the borrowed money has been used for the purpose of producing assessable income. This includes interest on loans used to acquire a rental property.

Taxation Ruling TR 95/25 sets out the Tax Office's view on the deductibility of interest expenses. In summary, for interest expenses to be deductible under section 8-1 of the ITAA 1997, the following general principles are relevant:

- The interest expense must have a sufficient connection with the operations or activities which more directly gain or produce the taxpayers assessable income and not be of a capital, private or domestic nature;

- The character of interest on money borrowed is generally ascertained by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower. However, regard must be had to all the circumstances, including the character of the taxpayers undertaking or business, the objective purpose of the borrowing, and the nature of the transactions of which the borrowing of funds is an element;

- A tracing of the borrowed money which establishes that it has been applied to an income producing use may demonstrate the relevant connection between the interest and the income producing activity;

- Interest on borrowed funds will not be deductible simply because it can be said to preserve assessable income producing assets.

The interest will not be deductible, to the extent to which it is private or domestic in nature.

Furthermore, Taxation Ruling TR 2000/2 sets out the deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities. For interest expenses to be deductible under section 8-1 of the ITAA 1997, the following general principles are relevant:

- Interest is fully deductible where funds drawn down on an investment account continue to be used exclusively for an income producing purpose.

- Interest is not deductible where funds drawn down on an account are used for a non-income producing purpose.

- Where interest accrues periodically on the outstanding balance of a mixed purpose line of credit account, the deductibility of accrued interest is determined by considering the application of the borrowed funds for income producing and non-income producing purposes.

- Where a taxpayer has a mixed purpose account, the interest needs to be apportioned between the income producing and non-income producing purposes. Apportionment must be made on a fair and reasonable basis.

In calculating the portion of the outstanding daily loan balance attributable to an income producing purpose, any repayment of principal is applied proportionately against the outstanding balance of amounts applied to income producing and non-income producing purposes respectively, at the time the repayment is made.

Where borrowed funds recouped are repaid to the mixed purpose account in reduction of the outstanding balance, those funds have ceased to be outstanding funds used for any purpose.

In your case you have a home loan and wish to redraw on available funds to purchase a rental property in country A .The portion of the interest you incur on money drawn down for the rental property is an allowable deduction under section 8-1 of the ITAA 1997.

Note

Apportionment of interest deductions

You will need to apportion the interest in relation to the rental property as the interest belonging to your home loan is private and domestic in nature and is therefore not an eligible deduction.

In a joint tenancy or tenants in common, you are entitled to claim only your share of the interest deductions in your tax return.

Disclosing the rental income

If you proceed with the purchase of the rental property in Country A, you will be required to complete an income tax return to show your foreign sourced income in addition to your Australian sourced income. The TaxPack Supplement will guide you as to where to include your foreign rental income/loss and what information you need to keep, to support your claims.

For more information you can visit our website on www.ato.gov.au. Our publication 'Rental Properties' provides detail of the type of rental expenses which can be claimed against the rental income and as well the record keeping requirements.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).