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Edited version of private ruling
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Ruling
Subject: Interest deduction
Are you entitled to claim a deduction for interest paid on an investment loan when the income producing property has been sold?
Yes.
Relevant facts
You and your spouse had a fixed term loan on a rental property. The fixed term of the loan was for five years.
You sold the property which was securing the loan after three years.
You used part of the proceeds of the sale to start a term deposit, which now secures the loan.
The fixed bank loan is for the same amount as the term deposit.
The capital gain produced by the sale was contributed to your business, which was suffering a shortfall of funds due to the global financial crisis.
If you had paid out the loan at the time of sale of the property, the bank would have charged you a substantial penalty.
Relevant legislative provision
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 Determination TD 95/27 deals with the continuing deductibility of interest on a loan once an original income producing asset (in this case a motor vehicle) acquired with the loan has been sold. It states that this will depend upon the use of the funds from the sale. If the money from the sale is used to produce assessable income, the interest paid by the taxpayer is still deductible.
In your case, the money received from the sale of the income producing property was put into a term deposit, as well as toward your business. Your term deposit is for the same amount as the outstanding loan.
As your term deposit is earning interest, the interest payments on the loan for that amount continue to be deductible under section 8-1 of the ITAA 1997.
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