Edited version of private advice

Authorisation Number: 1051757477116

Date of advice: 02 October 2020

Ruling

Subject: Deduction of interest expense

Question

Are you entitled to a deduction for interest incurred resulting from funds drawn from an offset account to home loan for the purposes of Investing under section 8-1 of the Income Taxation Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

The scheme commences on:

1 July 2020

Relevant facts and circumstances

You have obtained a Home Loan in X 20XX for $XXX,XXX.

There is an offset account attached to the Home Loan with currently approximately $XXXXX in funds in the account.

Your home loan allows you to withdraw the funds in the offset account up to the balance approximately $XX,XXX

You have sought financial advice regarding an investment strategy for the purposes of producing an income.

You will redraw up to $XX,XXX from the offset account for the purpose of investing in shares, ETF's and other income producing purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 8-1

Reasons for decision

Section 8-1 of the Income Taxation Assessment Act 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

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. Where a borrowing is used to acquire an income producing asset, the interest on this borrowing is considered to be incurred in the course of producing assessable income. With regards to borrowings relating to property, the interest will be deductible to the extent that the property is used to produce assessable income.

Taxation Ruling TR 93/6 Income tax and fringe benefits tax: loan account offset arrangements, outlines the Commissioner's view on 'interest offset arrangements' which are used to reduce the interest payable on a taxpayer's loan account. TR 93/6 provides that an acceptable loan account offset arrangement with dual accounts operates as follows:

There are two accounts a loan account and a deposit account. It is accepted that where the deposit account is a sub-account, it will be treated as a separate account.

No interest is received on the deposit account.

The interest on your loan can only be reduced to the extent of the amount of interest which would have been charged on the loan amount equal to the balance of your deposit account.

A taxpayer with an acceptable loan account offset arrangement with dual accounts is entitled to claim a deduction for the full amount of interest incurred on the loan account whilst the loan is used wholly for income producing purposes.

Depositing funds into the deposit account will decrease the interest payable on the loan account but will not decrease the balance of the loan account. Withdrawing funds from the deposit account will increase the interest payable on the loan account but will not increase the balance of the loan account.

In your case you have a home loan. The funds from the offset account will be used wholly for income producing purposes. You will redraw up to $XX,XXX from the offset account for the purpose of investing for income producing purposes. Accordingly, you are entitled to a deduction for the interest incurred on that loan that results from this use of the funds as long as, it is for income producing purposes as outlined.

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