Disclaimer
This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051276464315

Date of advice: 31 August 2017

Ruling

Subject: Rental property interest deductions

Question 1

Are you entitled to a 100% deduction on the interest on your property loan?

Answer

No

Question 2

Do you have to apportion the interest incurred on your property loan to take into account the amounts redrawn for non-income producing purposes before it became a rental property?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

201

Relevant facts and circumstances

You and your spouse purchased a property (the property) in 201A.

The property was purchased as your main residence which you lived in up to late 201B.

The initial loan on the property was $X

There have been various capital repayments made on the loan.

You redrew $X on X mid 201B and $X on X late 201B from the loan for private purposes.

On X late 201B the property was made available for rent.

The loan balance owing on X late 201B was $X.

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) provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature.

The principles in relation to the deductibility of expenses incurred in gaining or producing assessable income have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals.

Taxation Ruling TR 95/25 considers the deductibility of interest. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criteria. Where borrowed funds are used to acquire an income producing asset (for example, a rental property), the interest on the borrowed moneys is considered to be incurred in gaining or producing assessable income.

In your case, the amount outstanding on the loan for your property fluctuated due to your repayments and further redraws.

Because of this, at the time you changed the purpose of the residence to income producing, the outstanding balance of the loan did not reflect the amount originally borrowed to purchase the property. This amount would vary depending on the terms of the loan, and any repayments you had made.

Taxation Ruling TR 2000/2 contains the Commissioner's view on the deductibility of interest with regards to line of credit and redraw facilities. We consider a draw-down from a line of credit account or sub account, or a redraw from a loan account, is a separate borrowing. To the extent borrowings are used for income producing purposes, that part of the accrued interest attributable to those borrowings is deductible. Conversely, that part of the accrued interest attributable to borrowings for non-income producing purposes is not deductible.

This applies to your loan for your property to the extent that the balance of the loan owing at the time the residence became income producing was different than it would have been if you had not redrawn amounts from it.

Therefore, it will be necessary for you to reconstruct the withdrawal transactions on your property loan while the property was your main residence, as no deduction is allowable under section 8-1 of the ITAA 1997 for the interest incurred on the part of the loan which is not related to the purchase of the property.

The Commissioner will accept reasonable apportionment of the interest based on the income producing use of the funds over the private use of funds as a deduction.

A reasonable apportionment calculation is included here for your assistance:

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).