Edited version of private ruling

Authorisation Number: 1011670802213

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Ruling

Subject: Loan interest deduction

Are you entitled to claim a deduction for interest paid on a loan which is not used for income producing purposes?

No.

This ruling applies for the following periods

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You sold an investment property and purchased another investment property the day after the sale of the first property settled.

Due to a breakdown in communication between the bank and your solicitor the proceeds from the sale of the first property were used to pay in full the purchase price of the new investment property.

You intended to secure a new loan to fund the purchase of the new property, and understood that this would be available for drawdown on the date of settlement of the new property. This had been timed to be one day after the settlement for the sale of the existing property.

On the morning of the sale settlement of your property you were told that the new loan for the purchase of the new property was not yet available.

There were further issues with the loan setup due to do with the paperwork that the lender had arranged, and as a result, the loan was established over one month later.

The loan monies were paid to you and have not been used for income producing purposes.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings, including interest, 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 looks at the deductibility of interest. It states that the deductibility of interest depends upon satisfying, or being able to show, that the expense has sufficient connection with the operations or activities which directly gain or produce a taxpayer's assessable income. In other words, the interest must be incurred in relation to property which is held for income producing purposes.

Taxation Ruling TR 95/25 provides that the deductibility of interest is determined by the use for which the borrowed money is put. The 'use' test was established in Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153.

In your case, the loan amount was not applied to an income-producing purpose. Under tax law a borrowing that is not made for an income producing purpose would be considered private in nature and a deduction for the interest incurred would not be deductible under section 8-1 of the ITAA 1997.

While we appreciate that the circumstances of your case may have produced an unintended result, the fact remains that the rental property was purchased using your own funds and the monies from the loan taken out after settlement of the newly purchased investment property have been used for private purposes.

As a result, the interest paid on the loan will not be deductible under section 8-1 of the ITAA 1997 as the borrowed funds were used for private purposes.