1011498217547 | Legal database

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Edited version of private ruling

Authorisation Number: 1011498217547

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Subject: Deduction - interest - rental property

Question and answer

Are you entitled to a deduction for the interest on monies borrowed to purchase a property in a relative's name and given to them as a gift?

No.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You purchased a property and gave it to a relative as a gift.

The property's title is in the name of your relative.

The First Home Owner's Grant was obtained by your relative to assist with the purchase of the property.

You contributed some of your own money in purchasing the property. You also obtained a loan of to pay for the property.

You incur interest expense on the loan monies.

The property is presently rented but your relative will shortly reside in the property.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are incurred in gaining or producing exempt income.

Ownership

Taxation Ruling TR 93/32 explains that the loss or income from a rental property must be shared according to the legal interest of the owners, except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation.

Therefore, as the property was purchased in your relative's name, for income tax purposes, your relative is regarded as the sole owner of the property. As the sole owner of the property, all rental income is assessable to your relative.

Interest deduction

Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest. An interest expense must have a sufficient connection with the operations or activities which more directly gain or produce a taxpayer's assessable income.

Generally, where borrowed funds are used to acquire an income producing asset, such as a rental property, the interest incurred on the borrowed funds is considered to be incurred in gaining or producing assessable income and a deduction allowed for the amount of interest paid.

In your case, you purchased the property in the name of your relative and gave it to them as a gift. The property was purchased using your own savings, your relative's entitlement to the First Home Owner's Grant and by you obtaining a loan. The property has been rented and the rental income is used to offset the monies borrowed by you. Interest expense has been incurred on the loan monies. Your relative will occupy the property in the near future.

Regardless of the fact that the rental income is used to offset the loan obtained by you, the rental income is assessable to your relative as they are regarded as the owner of the property for income tax purposes. Therefore, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the interest expense as it is not incurred in gaining or producing your assessable income.

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