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Edited version of your private ruling
Authorisation Number: 1012289987828
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Ruling
Subject: Rental property - interest expenses
Question 1:
Are you entitled to claim a deduction for interest expenses on a loan used to acquire a rental property from the spouse of the director of the corporate trustee?
Answer:
Yes.
Question 2:
Will you obtain a tax benefit in connection with a scheme to which Part IVA of the Income Tax Assessment Act 1936 (Part IVA) applies?
Answer:
No.
This ruling applies for the following periods
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commenced on
1 July 2012
Relevant facts and circumstances
The spouse of the director of the corporate trustee owns a property which is currently rented.
The trust will purchase the property at market value.
The trust will obtain a borrowing from a bank or other financial institution to fund the purchase of the property.
The property will be rented at market rates through a property manager.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 177A
Income Tax Assessment Act 1936 Section 177C
Income Tax Assessment Act 1936 Subsection 177D(b)
Income Tax Assessment Act 1936 Section 177F
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Summary
You are entitled to a deduction for the interest expense on funds borrowed to purchase a property from the spouse of the director of your corporate trustee as the property will be used to generate assessable income. Part IVA does not prevent you from claiming the deduction as it is accepted that you will not obtain a tax benefit to which Part IVA would be applied.
Detailed reasoning
Interest expense
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 or a provision of the taxation legislation excludes it.
Taxation Ruling TR 95/25 states that the deductibility of interest is dependent upon how the borrowed funds are used. If the borrowed funds are used to purchase an income producing asset the associated interest expenses will be deductible.
You will borrow funds to purchase a property which will be used to generate assessable income through its rental. The property will be acquired from the spouse of the director of your corporate trustee at the market rate.
As the property will produce assessable income for you in the form of rental income, the interest expense incurred on money borrowed to purchase the property is a deductible expense.
Part IVA
Part IVA is a general anti-avoidance rule. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the Income Tax Assessment Act 1936 (ITAA 1936), be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.
In broad terms, Part IVA will apply where the following requirements are satisfied:
· there is a scheme (see section 177A of the ITAA 1936)
· a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with the scheme (see section 177C of the ITAA 1936), and
· the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b) of the ITAA 1936).
In instance, given a consideration of the arrangement as a whole, it is accepted that you will not obtain a tax benefit to which Part IVA would be applied.
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