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Edited version of private ruling
Authorisation Number: 1011505266245
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Ruling
Subject: Interest expenses
Question
Are you entitled to a deduction for the interest you will incur on the increased amount of your rental loan?
Answer:
No
This ruling applies for the following period
Income year ending 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts and circumstances
You own a property you use as your private residence (your home).
You have a loan in respect of your home (your home loan).
You own a rental property which you rent at market rates in an arms length arrangement.
You have a loan in respect of this rental property (your rental loan).
You will increase your rental loan by an amount which you will then direct in full to repay a portion of your home loan.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Section 8-1 of the Income Tax 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 or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. Interest on a new loan used to repay an existing loan will generally also be deductible as the character of the new loan is derived from the original borrowing: Taxation Ruling TR 95/25.
Instances where an existing loan is increased may result in circumstances where the loan contains mixed purposes. That is, the purpose of the original borrowing and the purpose of the amount of the increase. In these instances you are entitled to a deduction for only the portion of the interest of the increased loan which relates to an income producing purpose: Taxation Ruling TR 2000/2.
In your situation, you will make a further borrowing to your rental loan which will be used to repay your private home loan. As the character of this further borrowing is derived from the original borrowing which is being refinanced (your private home loan), the further borrowing is therefore also characterised as being private in nature. Accordingly you are not entitled to a deduction for the interest you incur on this private portion of the loan.