Edited version of private ruling

Authorisation Number: 1011531820993

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Ruling

Subject: Rental property - interest expenses

Are you entitled to a deduction for interest incurred on a loan taken out to acquire your spouse's 50% interest in a rental property?

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You and your spouse own a property (property 1) as joint tenants. You fully own this property and there is no finance owing on it.

You and your spouse have purchased a second property (property 2).

You and your spouse will move into property 2 and treat this property as your main residence.

You will rent out property 1.

You intend to obtain finance to acquire your spouse's 50% interest in property 1.

Property 1 will then be owned in your name only and you will claim interest expenses against your assessable income including rental income.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 8-1

Reasons for decision

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, or relate to the earning of exempt income.

Taxation Ruling TR 95/25 discusses deductions for interest under section 8-1 of the ITAA 1997. Whether a loss or outgoing satisfies the requirements of section 8-1 of the ITAA 1997 depends on all the facts and matters relating to the loss or outgoing.

The interest expense must have a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income and not be capital, private or domestic in 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. 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 funds are used to produce assessable income.

In your case, your property will be available for rent and you will have obtained finance to purchase your spouse's share in the property.

Therefore, as you will be the sole owner of the rental property and the loan will be in your name only, it is accepted that you are incurring all the interest expenses and are therefore entitled to claim a deduction under section 8-1 of the ITAA 1997 on the interest charged on the investment loan.

For further information please refer to Rental properties 2010 (NAT 1729-6.2010)

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'Part IVA general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.