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Edited version of private ruling
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Ruling
Subject: Deduction-interest expense
Are you entitled to a deduction for the interest incurred on funds redrawn from your home loan and used to purchase an investment property off the plan?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2010
Year ended 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 purchased an off the plan investment property.
The expected settlement date is in another income year.
You redrew funds from your home loan to pay a deposit on the investment property.
It is your intention to have the property available for rent once it is completed.
You incur interest expenses on the funds redrawn from your home loan.
Relevant legislative provisions
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.
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. 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. Interest incurred on a loan relating to a rental property will generally be deductible. Where the funds are used for non-income producing purposes to pay off a private residence, the accrued interest expense is not deductible under section 8-1 of the ITAA 1997.
Deductibility of interest before income producing activities
In Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case), the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. It follows from Steele's Case that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances:
· the interest is not incurred too soon, is not preliminary to the income earning activities and is not a prelude to those activities
· the interest is not private or domestic
· the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost
· the interest is incurred with one end in view, the gaining or producing of assessable income, and
· continuing efforts are undertaken in pursuit of that end.
You have redrawn funds from your existing home and used the funds to purchase an investment property off the plan. The expected settlement period is in another income year. The period of time between the purchase of the investment property and the settlement period is not considered to be so long that the necessary connection between the interest outgoing and the derivation of income is lost.
As your investment property will become income producing soon after the building is completed you will be entitled to claim a deduction under section 8-1 of the ITAA 1997 for the interest expense on the redrawn funds used to purchase the investment property off the plan.
Note: To determine your allowable deduction, you will need to apportion your interest expense between the income producing and non-income producing purposes of the home loan. Apportionment must be made on a fair and reasonable basis. Enclosed is a copy of Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities for your reference.
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