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Edited version of your private ruling
Authorisation Number: 1012443562565
Ruling
Subject: Interest expenses
Questions
1. Are you entitled to a deduction for interest incurred on a loan referable to a property previously held for investment purposes?
Answer:
Yes
2. Are you entitled to a deduction for interest incurred on a loan used to purchase a property which you used to live in but is now rented out?
Answer:
Yes
3. Are you entitled to any deductions related to a loan from a family member used to purchase a caravan in which to live?
Answer:
No
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You opened a line of credit with your spouse to purchase an investment property. The line of credit was secured against your residence.
You have since separated from your spouse and sold the property incurring a loss on the sale. You have since switched the type of loan from a line of credit to a variable home loan. This loan is secured against your residence. You are at present unable to repay the loan and you alone are currently paying the interest on the loan.
You have a separate loan outstanding on your residence in both your and your spouse's names. You are jointly paying this loan off with your spouse.
You intend to rent out your residence at market rate.
You intend to borrow money from a family member to purchase a caravan in which to live.
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 you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature.
Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put.
Outstanding loan used to purchase an investment property
Where interest has been incurred over a period after the assets representing those borrowings have been sold and relevant income earning activities have ceased, it is apparent that the interest is not incurred in gaining or producing the assessable income of that period or any future period. However, 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.
Whether or not the occasion of the outgoing of interest is to be found in what was productive of assessable income of an earlier period requires a judgment about the nexus between the outgoing and the income earning activities.
In Placer Pacific Management Pty Ltd v FC of T 31 ATR 253; 95 ATC 4459 at p 4464, the Full Federal Court judgement stated:
'In our view AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations towards the gaining or producing of assessable income generally, the fact that the outgoing was incurred in a year later than the year in which the income was incurred and the fact in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility'.
The decisions in FC of T v Brown (1999) FCA 721; (1999) 43 ATR 1; 99 ATC 4600 (Browns case) and FC of T v Jones [2002] FCA 204; 2002 ATC 4135; (2002) 49 ATR 188 (Jones case) support the view that the principle applies equally to recurring expenses such as interest.
Along with Riverside Road Pty Ltd (in liq) v FC of T (1990) 23 FCR 305; 90 ATC 4567; (1990) 21 ATR 499, Browns case and Jones case are considered the authority for the ability to claim a deduction for interest incurred after a business has ceased provided:
· The loan was entered into while the business was in existence;
· The funds borrowed were used for business purposes;
· There is no act that severs the interest from its connection with the former business operations which were the occasion for the loan; and
· The interest as it occurs is still sufficiently proximate to the taxpayer's business activities.
Taxation Ruling TR 2004/4 deals with interest incurred prior to the commencement of, or following the cessation of relevant income earning activities.
TR 2004/4 states that when interest has been incurred over a period after the relevant borrowings (or assets representing those borrowings) have been lost to the taxpayer and relevant income earning activities have ceased, it is apparent that the interest is not incurred in gaining or producing the assessable income of that period or any future period. However, 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.
As such, the sale of the investment property is not sufficient to sever the nexus between interest payments on a loan and your interest in producing assessable income from their investment of the loan funds. Please note that the use of your residence as guarantee for the loan has no relevance to the deductibility of the interest expenses.
Outstanding loan against residence
Once you use your residence as a rental property to produce assessable income then the interest on the outstanding loan is deductible under section 8-1 of the ITAA of 1997. The fact that the loan was previously for your residence does not disqualify you from claiming the interest deduction when it is incurred in producing income. Please note that you can only claim the expenses that relate to the income producing period.
Loan to purchase caravan
Section 8-1 of the ITAA 1997 specifies that losses or outgoings are deductible to the extent that it is incurred in gaining or producing assessable income. So, if you borrow money to purchase a caravan used for private purposes then the expenses incurred are not deductible as there is no link between the caravan and the earning of assessable income.
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