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Edited version of private ruling
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Ruling
Subject: Interest expenses
Are you entitled to a deduction for interest expenses incurred on a loan taken out to fulfil the requirements of a Family Court agreement?
No.
This ruling applies for the following periods:
Year ended 30 June 2010
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
The scheme commenced on:
1 July 2009
Relevant facts and circumstances
You entered into a Family Court agreement with your former spouse.
You agreed to pay your former spouse a sum of money and your former spouse agreed that you would become the sole owner of the two properties you formerly both owned jointly. One property was your main residence and the other was an investment property.
You entered into a loan in order to finance the payment to your former spouse and other costs such as transaction and mortgage insurance costs.
After the agreement was finalised, you continued to rent out the investment property and moved out of your former main residence and began to rent that property out as well.
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, or relate to the earning of exempt income.
The Commissioner's view on the deductibility of interest income is set out in Taxation Ruling TR 95/35. According to this ruling, whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put.
The 'use' test, established in 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.
In your case, you entered into a Family Court agreement with your former spouse in which you would pay your former spouse a sum of money and you would become sole owner of the two properties you formerly jointly owned. You entered into a loan which you used in part to finance the payment to your former spouse.
The use of the loan is therefore to fulfil your obligations under the Family Court agreement you entered into with your former spouse. This is private and domestic in nature and does not relate to the earning of assessable income. This is not changed by the fact that after the Family Court agreement was finalised you then used both of the properties as investment properties.
Therefore, you are not entitled to a deduction for the interest expense incurred in relation to a loan taken out to fulfil the requirements of a Family Court agreement.
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