ATO Interpretative Decision
ATO ID 2001/79
Income Tax
Interest expense: Funds BorrowedFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Whether interest on funds borrowed to acquire the share of the taxpayer's spouse (the spouse) in a property, to be kept for investment purposes is deductible.
Decision
The interest is deductible under section 8-1 to the extent that the borrowed funds are used for the purposes of producing assessable income.
Facts
The taxpayer and the taxpayer's spouse own a property as joint tenants. The taxpayer has obtained an independent valuation of the property. The taxpayer intends to borrow an amount of money equal to one half of the value of the property to fund the purchase of the spouse's half share in the property. After the acquisition of the spouse's half share the taxpayer intends to let the property to tenants.
Reasons For Decision
Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income.
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 FC of T 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 criterion. The interest incurred will be deductible to the extent that the property is used to produce assessable income.
Date of decision: 9 January 1998
Legislative References:
Income Tax Assessment Act 1997
section 8-1
Case References:
FC of T v Munro
(1926) 38 CLR 153
99 ATC 4242
41 ATR 139
Keywords
Arms length transactions
Associated persons
Disposal of real estate
Negative gearing
Non arms length transactions
Principal residence
Rental expenses
Rental property
Rental property loan interest expenses
Tax planning, avoidance and evasion
ISSN: 1445-2782