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Edited version of private ruling

Authorisation Number: 1011748041417

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Ruling

Subject: Interest deduction

Question

Are you entitled to a deduction for interest on a loan after the rental property was sold?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You have owned a rental property overseas for a number of years?

The property was financed with an overseas loan and an Australian loan.

You sold the property at a loss.

Funds from the sale of the property were directed to the overseas loan.

As there were insufficient funds from the sale to completely pay out the loans, you paid out the overseas loan and there remains an Australian loan.

You do not have capacity to pay out the loan at this stage.

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.

Taxation Ruling TR 2004/4 examines the deductibility of interest after the cessation of the income earning activities. You may still be entitled to a deduction for recurrent interest expenses incurred after the cessation of your previous income earning activity. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period.

However, the nexus between the interest expense and the relevant income earning activities will be broken where:

In your situation, it is accepted that the interest you incur resulted from a loan left after the funds from the sale of the investment property were expended on the other existing loan.

You do not have the ability to repay the loan in a lump sum and it is not a conscious decision to extend the loan. Accordingly, you are entitled to a deduction for the interest on the residual borrowings relating to the loan for the sold investment property.

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