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Edited version of private ruling
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Ruling
Subject: Rental property interest
Are you entitled to a deduction for interest on a loan used to purchase a rental property and undertake renovations to it?
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You purchased an investment property.
To fund the property plus have some renovations done to it, you took out a loan using your residential home as security.
The title of the investment property is in your name. The loan is in your name with your spouse as guarantor.
The title of the family home is in your and your spouse's name.
The property was available for rent at market rate as soon as you purchased it.
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.
Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest. An outgoing of interest is incidental and relevant to the gaining of assessable income if the funds were borrowed for the purpose of gaining that income (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153). The use test is the basic test relied upon to establish the deductibility of interest and looks at the application of the borrowed funds as the main criterion.
Accordingly, where a loan is used for an income producing purpose the interest on the loan is deductible.
Taxation Determination TD 93/13 considers the deductibility of interest on a loan used to acquire an income producing property where a non-income producing property (for example, the family home) is used as security for the loan. This determination provides that the deductibility of interest is determined by the use of the borrowed money and not by the security given for the borrowed money.
Therefore, as the entire loan was taken out to fund the investment property plus renovations, a deduction is allowed for the interest on the loan.
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