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Edited version of private ruling
Authorisation Number: 1011693010086
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Ruling
Subject: Investment Interest
Question 1
Are you entitled to a deduction for 50% of interest on an existing loan jointly held by yourself and your spouse?
Answer
Yes.
Question 2
Are you are entitled to a deduction for the interest expenses on the additional loan you will be taking out to acquire your spouse's share of the property?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You own your principal place of residence jointly with your spouse.
You plan to purchase another property as your principal residence and keep your current residence as an investment property.
You want to buy out your spouse's share of the existing property.
There is currently a mortgage on the existing property.
You will take an additional loan to buy out your spouse's share of the property, based on the current market value as per your bank's valuation.
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) provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature.
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 looks to the application of the borrowed funds as the main criteria (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153). Where borrowed funds are used for investment purposes such as the acquisition of a rental property, the interest will be deductible to the extent that the property is used to produce assessable income.
In your case, you will be incurring interest on a loan which you will obtain to acquire an investment property. The property is being purchased at market value in an arms length transaction. As the borrowed funds are being used for income producing purposes, the associated interest expenses are an allowable deduction.
The fact that you are purchasing the property from your spouse does not change the deductibility of the expense in your specific circumstances. The interest expenses incurred are an allowable deduction under section 8-1 of the ITAA 1997.
However, as you and your spouse share the existing loan, your share of that loan is half. Even though you are acquiring full ownership of the property, the loan remains a joint loan and your share is half of that amount.
Therefore, you are entitled to 50% of interest incurred on the existing loan.