| Disclaimer This edited version will be removed from the Database after 30 September 2025. If you believe the issues detailed in this edited version warrant retention in an alternative form, email publicguidance@ato.gov.au This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011548118797
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: Interest expense
Are you entitled to claim a deduction for the interest on a loan used to purchase a property to live in?
No.
This ruling applies for the following periods:
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You currently own your residential home.
The loan on this property is effectively paid off.
You are intending to take out a loan to purchase a second property by using your main residence as security for the loan.
Your reason for taking out the loan for the second property is to have an investment for your retirement.
You intend to move out of your main residence and move into the second property.
You intend to rent out the property you currently reside in.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
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. No deduction is allowed if the outgoings relate to the earning of exempt income or a provision of the taxation legislation excludes it.
Taxation Ruling TR 95/25 looks at the deductibility of interest. It states that the use test, established in Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, is the basic test for deductibility of interest and looks at the application of the borrowed funds as the main criterion.
In Taxation Board of Review Case B11 70 ATC 46; 15 CTBR (NS) Case 74, the taxpayer purchased a new home with borrowed moneys, having decided to retain ownership of his former home with a view to lease it. The former home was let to a tenant for a term commencing at about the same time that the taxpayer vacated it and took up residence in his new home. The taxpayer's claim for deduction against the rent received for the interest paid on the borrowed monies was disallowed. It was held that the borrowed monies not only enabled the taxpayer to retain his former home for income-producing purposes but also to acquire ownership of a new house as a family residence. Although it would not have been possible to achieve both these results without borrowing, no apportionment of the interest paid is possible as the deductibility of interest depends directly and only on the use to which the principal is put.
Your situation is the same as the case discussed above. You are using the borrowed funds to buy a second property to use as your new main residence which is a non-income producing asset. The interest on the loan is therefore not an allowable deduction under section 8-1 of the ITAA 1997.
The fact that your current property will be rented out and will be used as security for the loan is not relevant in considering the deductibility of the interest on the loan. It is the use of the funds borrowed rather than the security for the loan that determines whether the interest is deductible. As the borrowed funds will be used to buy your new home, not a rental property, the interest will not be deductible.
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).
