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Edited version of private ruling
Authorisation Number: 1011642458247
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Ruling
Subject: Loan interest
Question
From the date the property was made available for rent, are you entitled to a deduction for the interest expense you incur on a private loan used to partially fund the purchase of the property?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commences on:
1 March 2009
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
In early 200X you and your spouse purchased a property. The title deed lists you and your spouse as joint tenants.
The property was your primary residence before it became a rental property in the subsequent year.
Two loans were taken out to purchase the property, one with bank A and one with bank B.
The bank A loan was obtained in you and your spouse's name.
The bank B variable rate home loan was obtained by your parents on behalf of you and your spouse to assist you in purchasing the property.
A verbal agreement between you, your spouse and your parents stipulated that the funds would be on-lent to you on the condition that you repay the principal and interest as per the terms and conditions of the original loan.
The loan repayments for both loans are paid from you and your spouse's joint bank account.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
Summary
It is accepted that the loan arrangement between you and your parents is of a commercial nature. Therefore you are entitled to a deduction for interest you incur on the private loan from the date the property was genuinely made available for rent.
Detailed reasoning
Section 8-1 of the Income Taxation 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.
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, the interest on this borrowing is considered to be incurred in the course of producing assessable income.
However, interest may not be deductible either in full or part where non-commercial terms apply (for example, where the interest rate payable on a loan is greatly above or below the market rate).
In your situation, you used borrowed funds to acquire a rental property. Therefore the interest you incur on these borrowings will be used to acquire an income producing asset.
Your parents provided you with funds for part of the purchase price of the property, on the condition that you repay the principal and interest as per the terms and conditions of the original loan.
The terms of the loan were established with a verbal agreement between you and your parents, and it is accepted that the arrangement is of a commercial nature. Consequently you are entitled to a deduction for 50 percent of the interest you incur on the private loan from the date the property was made available for rent.
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