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Edited version of private ruling
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Ruling
Subject: interest expenses
Are you entitled to a deduction for a portion of interest expenses relating to a rental property?
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You purchased your current principal residence. You have lived at this address continuously in the property from purchase to the current date.
You refinanced your mortgage at an increased amount. The additional funds were used to pay for an overseas trip.
You would like to make this property available for rent in the near future and move to another property which will then be your main residence.
Relevant legislative provisions
Section 8-1 of the Income Tax Assessment Act 1997
Reasons for decision
Interest expenses are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that they are incurred in gaining or producing assessable income except to the extent that the expense is of a capital, private or domestic nature.
Taxation Ruling TR 95/25 identifies the general principles relevant to the question of whether interest is deductible under section 8-1 of the ITAA 1997. These principles include:
· there must be a sufficient connection between the interest expense and the activities which produce assessable income, and
· the objective circumstances of the use to which borrowed funds are put by the borrower must be considered to ascertain the character of interest on money borrowed.
The original purpose of the borrowing and use of the borrowed funds will not always determine the deductibility of interest.
Where there are changes in the use of money borrowed for a particular purpose, the deductibility of the interest accrued on that part of the outstanding debt will be determined by considering the advantages sought from that new application of those funds.
When borrowed money has been used to purchase a private residence which is later rented out, the interest will be deductible under section 8-1 of the ITAA 1997 to the extent that it is incurred on that part of the outstanding borrowed money used at that time for an income producing purpose.
In your case, you intend to rent out your principal residence. You are entitled to a deduction for the interest expenses relating to the purchase of the property from the point at which it becomes available for rent.
As you refinanced the loan and some of the refinanced money was used for a private purpose you will need to apportion the interest expense in line with Taxation Ruling 2000/2. In order to do this, you must establish what portion of the loan is attributable to the income producing property and what portion is attributable to your private purposes.
Any apportionment must be made on a fair and reasonable basis.
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