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Edited version of your written advice
Authorisation Number: 1051377691658
Date of advice: 1 June 2018
Ruling
Subject: Deductibility of interest accrued on a line of credit used to make interest only repayments on an investment property.
Question 1
Is 97% of interest accrued on your line of credit used to pay interest only loan repayments on your investment property tax deductible?
Answer
Yes.
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for any loss or outgoing that is incurred in gaining or producing assessable income to the extent that it is not of a private, capital or domestic nature.
Taxation Ruling (TR) 2000/2 considers the deductibility of interest incurred by borrowers on moneys drawn down under line of credit facilities. As per paragraph 7 of TR 2000/2 the focus of the ruling is on mixed purpose sub-accounts; however this also applies to single line of credit accounts used for mixed purposes. In your case the line of credit was used for providing deposits to purchase Property A and Property B and currently making the interest only payments on the investment loans and receiving the rent for these properties.
Paragraph 12 of TR 2000/2 provides that interest is fully deductible on a line of credit facility where the funds drawn down are used exclusively for an income producing purpose. You attributed the drawdown as XX% to Property A, XX% to Property B and X% to the property investment mentoring arrangement. It was stated that the line of credit was also used to provide deposits to purchase the two investment properties.
The interest incurred on the line of credit is an allowable deduction under section 8-1 of ITAA 1997 as the funds have been used for income producing purposes.
Question 2
Will the anti-avoidance provision in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) be applied to deny deductibility of interest accrued as per Question 1?
Answer
No.
As the deduction is allowable under section 8-1 of ITAA 1997, the anti-avoidance provision in Part IVA of ITAA 1936 would not be applied to deny deductibility of interest accrued.
This ruling applies for the following periods:
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You have a line of credit which was drawn down to provide deposits to purchase two investment properties. This was also used to pay for a property investment mentoring arrangement for which the sole purpose was to assist with selection of the investment properties.
The drawdown is comprised of:
● XX% to Property A
● XX% to Property B
● XX% to the property investment mentoring arrangement.
You advised you will not be deducting the X% interest in relation to the property investment mentoring arrangement Separate interest only loans from different financiers were used to purchase Property A and Property B.
The interest only payments for these two loans are paid directly via direct debit from the line of credit.
All rent received from Property A and Property B is deposited into the line of credit account.
No other payments are made into the line of credit account.
As the rent received is less than the interest only payments, the balance of the loan account is increasing each year as a portion of the interest on the line of credit is being capitalised.
There are no other transactions in the line of credit account and it has never been used for any purpose other than providing deposits to purchase Property A and Property B, making the interest only payments on the investment loans and receiving the rent for the properties.
You have a fourth loan in partnership with your family members. This loan was used to purchase a primary place of residence. It is jointly owned with your family members and you all live at that residence. All surplus funds that you receive are deposited into an offset account which reduces the interest payable on the joint loan account. You intend on utilising the surplus funds to purchase your own home to live, in the next two years.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1936 Part IVA
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