Edited version of your private ruling

Authorisation Number: 1012427619465

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Redraw of investment loan funds

Question

Are you entitled to a deduction for interest on redrawn funds that were used to finance your new private residence?

Answer

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are the joint owner of a rental property. The investment loan for this property is in the same names.

When you sold your principal place of residence you sought advice from your accountant on the use of the sale proceeds while you were looking for a new house to live in.

You understood from this advice that you could use some of the proceeds to temporarily reduce the balance of the loan account, and redraw on those funds when needed to settle on the new principal place of residence.

You subsequently did this, and were unaware until preparing your current income tax return, that the reduction of your mortgage loan would permanently affect the amount of interest which could be deducted from it.

You now realise that you could have parked the surplus funds in an offset account.

You experienced stressful circumstances when relocating interstate, changing accountants and dealing with many different bank staff.

You feel that your intentions were misunderstood, as at no time did you intend to change the purpose of the investment loan.

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.

Interest expenses incurred on borrowed funds that are used for income producing purposes fall for consideration under section 8-1 of the ITAA 1997.

Taxation Ruling TR 2000/2 deals with the deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities. The deductibility of interest on a further borrowing of money under a redraw facility depends upon the use to which the redrawn funds are put.

In your case, the redrawn funds were used to purchase a property which is your principal place of residence. The redrawn funds were be used for a non income producing purpose. Therefore the interest attributable to this capital component will not be deductible.

We accept that there may have been a breakdown in communication between your accountants and the bank and the stress of relocating and that you did not intend changing the purpose of the loan. However the Commissioner does not have the discretion to allow an interest deduction for redrawn funds that have been used for a non-income producing purpose.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).