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Edited version of your private ruling
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Ruling
Subject: Rental property deductions
Question
Are you entitled to a deduction for the full amount of interest paid on a loan used to acquire your share in a rental property?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commences on:
1 July 2007
Relevant facts and circumstances
You purchased a share in an investment property with your partner.
The total purchase price of the property was $X plus settlement costs.
The title shows you and your partner as joint owners.
You and your partner maintain separate financial arrangements wherever practical.
To purchase your share of the property, you obtained an interest only investment loan of $X solely in your name. The security for the loan is a property that you solely own.
Your partner made individual arrangements to fund their share of the purchase price of the property.
Since purchasing the property you have paid interest for each financial year.
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 your assessable income. However, a deduction is not allowed where the loss or outgoing is of a capital, private or domestic nature or incurred in relation to gaining exempt income.
Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest. 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 borrowed funds are used for income producing purposes the interest on those funds is deductible.
Co-owners who are not carrying on a rental property business must divide the income and expenses for the rental property in line with their legal interest in the property. If they own the property as joint tenants, they each hold an equal interest in the property.
However, according to the guide for rental property owners, 'Rental properties 2012', interest on money borrowed by only one of the co-owners which is exclusively used to acquire that person's interest in the rental property does not need to be divided between all of the co-owners.
In your case, you took out a loan to purchase an interest in a rental property. The money borrowed was used exclusively to acquire your interest in the property. The interest you incurred on the loan does not need to be divided between the co-owners of the property. Therefore, you are entitled to a deduction for the full amount of interest incurred on your loan.
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