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Edited version of private ruling
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Ruling
Subject: Rental property expenses
Are you entitled to your share of interest on a second loan to finance an investment property?
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You and your spouse have purchased a rental property as tenants in common.
You took out two separate loans so that you did not have to pay mortgage insurance. The second loan included an amount for stamp duty.
Both loans are only for investment purposes for the property.
Your residential home is used as security for the loans.
As soon as you acquired the property, it was available for rent through a rental agent.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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.
Taxation Ruling TR 95/25 provides that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. The use test, established in FC of T 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.
Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. However, if the borrowed money is used only partly to produce assessable income, only that part of the interest which relates to the production of assessable income is an allowable deduction.
You borrowed funds in two loans to purchase a rental property. The property has been available for rent through a real estate agent since it was purchased, and you have received rental income from the property. As such, the interest on the borrowing on both loans is considered to be incurred in the course of producing assessable income and is an allowable deduction.
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