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Edited version of private ruling
Authorisation Number: 1011573450744
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Ruling
Subject: Deductibility of interest against rental property income
Question 1
Will you be entitled to claim a deduction for the full amount of your share of the interest incurred on your investment property loan after the funds that you deposited into your mortgage account are withdrawn and used for a non-income producing purpose?
Answer
No
This ruling applies for the following period:
01/07/2010 to 30/06/2011
The scheme commences on:
01/07/2010
Relevant facts and circumstances
You and your spouse maintain an investment loan which has been used to fund the purchase of an investment property. You include the rental income from the investment property in your return and claim deductions including interest.
You and your spouse sold your business during the relevant income tax year.
The proceeds of the sale of the business were paid into the investment loan account in you and your partner's names.
The current outstanding balance of the loan is minimal as at the time of the application for private ruling.
You intend to withdraw the deposited amount from the sale of the business which you state was parked in the loan account temporarily and place it into superannuation for you and your partner.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Summary
Will you be entitled to claim a deduction for the full amount of your share of the interest incurred on your investment property loan after the funds that you deposited into your mortgage account are withdrawn and used for a non-income producing purpose?
Detailed reasoning
No.
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.
If a taxpayer takes out a loan to purchase an investment property, the taxpayer can claim the interest charges on that loan as a deduction if the property is rented, or available for rental. Banks and other lending institutions offer a range of financial products which can be used to finance an investment property. Many of these products permit flexible repayments and redraw facilities.
Taxation Ruling TR 2000/2 provides the ATO view on the deductibility of interest on money drawn down on a loan with redraw facilities. In paragraph 24 of TR 2000/2 it states:
…where the original borrowing is for income producing purposes and the taxpayer uses the redrawn funds wholly or partly for non-income producing purposes, that part of the accrued interest attributable to the redrawn funds used for non-income producing purposes is not deductible.
The Commissioner has acknowledged an alternative view where it is suggested that funds redrawn from a loan account which can be attributed to the extra repayments made, simply represent a withdrawal of funds temporarily 'parked in the loan'. This alternative view is based upon a characterisation of the extra repayments as effectively remaining an asset of the borrower, available to the borrower by virtue of the contractual right to redraw them. The ruling goes on to explain that this view is not correct (paragraph 49 of TR 2000/2). The extra repayments have been used to discharge part of the loan debt and the subsequent redraw is funded by a subsequent increasing of the loan debt. In the ATO view, the redraw is a new borrowing of money. The deductibility of the interest payable on those new borrowings depends upon the advantages sought from the use of those funds.
In your case you made a payment to your investment loan when you paid the proceeds of your sale of your business into this loan. You then propose to redraw the same amount and apply this amount to a superannuation investment.
Applying the principles set out in TR 2002/2 to your situation you are considered to have reduced the borrowing that relates to the investment property. The amount redrawn will not be applied to an income-producing purpose. Therefore, the interest paid on the redrawn portion of the loan amount is not deductible.
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