| 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this edited version warrant retention in an alternative form, email publicguidance@ato.gov.au This edited version has been archived due to the length of time since original publication.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: 1011560588544
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: Rental property expenses - interest
1. Are you entitled to a deduction for the interest expenses you incur on your loan where the funds are used for a private purpose?
No.
2. Are you entitled to a deduction for the interest where the funds are used to produce assessable income?
Yes.
This ruling applies for the following periods
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commenced on
1 July 2008
The scheme that is the subject of this ruling:
You purchased your current home and entered a standard variable home loan.
The loan has been refinanced and there is an outstanding balance. You refinanced into a new standard variable home loan and a standard variable loan.
You purchased an investment property and entered into a new loan.
The loan is a standard variable loan.
The investment property is rented out.
You intend to take the rental incomes from the investment property to pay towards the primary home loan.
You are also making regular extra repayments from your salaries to help pay back the primary home loan.
You are the sole owner of the properties.
You are using the standard variable loan for payment of the interest off your third loan which was used for rental property purposes.
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, or relate to the earning of exempt income.
Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. TR 95/25 specifies that to determine whether the associated interest expenses are deductible under section 8-1 of the ITAA 1997, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.
The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which assessable income is to be derived, the interest incurred on the loan will be deductible.
Generally, interest incurred on funds borrowed to acquire an income-producing asset is an allowable deduction as is interest incurred in relation to a property that becomes income producing after being used for private purposes.
Where an original borrowing is refinanced, the new loan takes on the same characteristics as the original borrowing. If a deductible borrowing is refinanced, the interest on the new loan will generally be deductible.
Application to your circumstances
In your case, you have taken out three loans. The first loan was a standard variable home loan of for the purchase of your current home.
You refinanced this loan to be a part standard variable home loan and a part investment loan.
The third loan was taken for the purchase of an investment property.
In looking at the use to which the loans were used it is determined that:
1. The first loan was used for the purpose of purchasing your home. As the loan was taken out to purchase a non income producing property the interest payable on this loan is not deductible.
2. The second loan was taken out partly for the repayment of your home loan and partly for the purchase of investment properties. Only that portion of the loan interest relating to the investment property is deductible.
3. The interest paid on the third loan taken out for the purpose of purchasing a rental property will be deductible.
Where you use rental income to pay off a home loan there will be no allowable deduction.
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).
