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Edited version of private ruling
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Ruling
Subject: Rental property expenses
Question and answer:
Are you entitled to a deduction for interest on a loan that you use to purchase a rental property from your spouse?
Yes.
This ruling applies for the following period:
Year ending 30 June 2011
The scheme commenced on:
1 July 2010
Relevant facts and circumstances
Your spouse is the owner of an investment property.
You spouse plans to sell this property to you at market value as an arms length transaction.
You will use this property to earn rental income.
You will incur depreciation and interest expenses in relation to owning this investment property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
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 Federal Commissioner of Taxation 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 will be deductible to the extent that the property is used to produce assessable income.
In your case, you intend to gain assessable income from renting the property.
As you will be the sole titleholder of the property, any interest expense incurred by you, from the time the property is rented or becomes available for rental purposes is deductible.
The fact that you are purchasing the rental property from your spouse does not alter the fact that the use of the loan is to purchase a rental property.