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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012299024930

Ruling

Subject: Interest expenses

Question

Are you entitled to a deduction for the interest expenses on a loan used to purchase a rental property?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are the sole owner of a rental property.

You obtained a borrowing to fund the purchase of the rental property.

You do not have a written loan agreement.

Under the informal arrangement you meet the repayments of the loan which includes both interest and capital components.

The lender does not make any contribution to the rental property expenses.

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 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 have borrowed funds to purchase a property which has been rented. Whilst you have no formal loan agreement, you make repayments to the loan which contain both capital and interest components.

As the interest expenses relate to earning your assessable rental income you are entitled to a deduction for the interest expenses incurred on the loan.


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