1011515454775 | Legal database

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Edited version of private ruling

Authorisation Number: 1011515454775

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Ruling

Subject: interest deductions

Question:

Are amounts you pay to your spouse, purporting to be interest payments, an allowable deduction?

Answer:

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You and your spouse have a disabled minor child.

You and your spouse purchased an investment property. You contributed approximately X% of the purchase price and your spouse contributed approximately Y%.

There is currently no mortgage on the property.

The legal title of the investment property is in your name only. This was to ensure the property would not be included in your spouse's estate and the capital and income from the property would be available to you, and your child, should they pass away before you.

It was also intended that in the mean time the income would benefit you, your spouse and your child; with the income from the property being paid into a joint account and all rental property expenses being paid from the same account.

You now wish to pay your spouse an amount as interest on their capital contribution to the purchase price of the property and claim this interest payment as a tax deduction against the rental income; however, you do not want to enter into a formal loan agreement that will ultimately form part of their estate.

The amount to be paid to your spouse may change over time and would be decided on a year by year basis.

At the time of purchase, your spouse's superannuation benefit was not tax free.

Reasons for decision

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.

In your case, your spouse provided approximately Y% of the purchase price of the rental property, which was then legally registered in your name only, by way of advancement, to ensure the property would not be included in their estate when they passes away. The main reason for this was so that you would retain both the capital and income benefits of the property for the support of yourself and your disabled child after their death.

What you are now proposing is to treat your spouse's contribution to the purchase price of the property as a loan in order for you to pay to them and then claim as a deduction amounts purporting to be interest payments as a way of splitting the rental income you receive; however, you will not enter into a formal loan agreement that would ultimately form part of their estate.

As there was no loan agreement at the time the contribution to the purchase price of the property was made, it cannot now be treated as a loan for taxation purposes. Your spouse's contribution to the purchase price of the property, and any amount paid to them purporting to be repayments of interest on that money, are considered to be a private and domestic arrangement and not a commercial one.

Any amounts you pay to your spouse purporting to be interest on their contribution to the purchase price of the rental property are not deductible as they are considered to be private and domestic in nature.

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