1051401883762 | Legal database

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Edited version of your written advice

Authorisation Number: 1051401883762

Date of advice: 19 July 2018

Ruling

Subject: Interest expenses

Question

Are you entitled to a deduction for your portion of the interest expenses on your line of credit account being used only for your deductible rental property expenses?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 20xx

The scheme commenced on

1 July 20xx

Relevant facts

You and your spouse own some investment properties as tenants in common.

The properties are rented out and earn assessable income.

You would like to release equity from your existing properties to service your investment portfolio. You intend to obtain an equity loan/line of credit facility to service your deductible investment property expenses such as council rates, water rates, body corporate levies, insurance and interest.

You will be paying the interest accrued on the equity loan/line of credit facility when due with your own cash. You wish to preserve cash for personal security.

The equity loan/line of credit facility will only be used for investment purposes. The equity loan/line of credit facility will be in joint names.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Interest expenses

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.

Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.

The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion.

Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. However, where a loan relates to private purpose, no deduction is allowed.

Line of credit facilities

Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities considers the deductibility of interest incurred by borrowers on money drawn down under line of credit facilities and loans offering redraw facilities.

The ruling establishes drawing any excess or available funds from the loan is treated as a new loan. As such the purpose or use of the drawing is relevant. That is, the deductible portion of interest when further borrowings are made depends on the use to which the redrawn funds are put.

Where a person uses the redrawn funds for different purposes then the loan account becomes a mixed purpose account. In a mixed purpose loan, the interest must be apportioned between the income producing and non-income producing purposes. The part of the accrued interest attributable to the funds used for private purposes is not deductible.

In your case your line of credit account will be used solely for your investment properties. As your line of credit account is being used only for your investment property expenses, the associated interest expenses incurred are an allowable deduction.

Please note that co-owners of a rental property divide the income and expenses for the rental property in line with their legal interest in the property (Taxation Ruling TR 93/32). Therefore you are only entitled to a deduction of the relevant interest expenses according to your legal title in the properties.

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