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Edited version of private ruling
Authorisation Number: 1011667237899
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Ruling
Subject: Rental Deductions - Interest
Question
Are you entitled to a deduction for interest on a loan used to purchase a 50% share in a rental property?
Answer: Yes
This ruling applies for the following period
Year ended 2010
The scheme commenced on
1 July 2009
Relevant facts
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
· the application for private ruling and
· copy of the loan agreement
· copy of land transfer certificate
You and your spouse have been living in a residential property .The property is solely owned by your spouse.
Both you and your spouse have moved out of this property and the property is now being rented.
You have taken out a loan to purchase a 50% share of the rental property.
The title of the property has been changed to reflect your share.
You have incurred interest expenses relating to this 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 (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 provides the Commissioner's view regarding the deductibility of interest. An outgoing of interest is incidental and relevant to the gaining of assessable income if the funds were borrowed for the purpose of gaining that income (FC of T v. Munro (1926) 38 CLR 153; (1926) 32 ALR 339). The use test is the basic test relied upon to establish the deductibility of interest and looks at the application of the borrowed funds as the main criterion.
Accordingly, where a loan is used for an income producing purpose the interest on the loan is deductible.
In your case you have borrowed money to purchase a 50% share of a rental property. Therefore, you are entitled to a full deduction for the interest you have incurred.