| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011709543407
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: Deduction - interest
Question and answer
Are you entitled to a deduction for the interest incurred on an amount from a draw down loan which you will use to repay a previous gift to your parents?
No
This ruling applies for the following periods:
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
The scheme commences on:
1 July 2010
Relevant facts and circumstances
Your parents gifted to you an amount of money which was used as the deposit for the purchase of a property in 200X.
You lived in the house for a short period of time but it is now a rental property.
In the recent year, you applied for a drawn down loan against the equity in the house to purchase air-conditioning for the property.
You are now considering using part of the draw down loan monies to give to your parents as they are getting older and may need the money for themselves.
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.
Generally interest incurred for income producing purposes is deductible under section 8-1 of the ITAA 1997, to the extent that it is not capital, private or domestic in nature.
Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. TR 95/25 specifies that to determine whether the associated interest expenses are deductible under section 8-1 of the ITAA 1997, it is necessary to look at the use to which the borrowings are put.
The 'use' test, established in the Federal Court case FC of T v Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible.
As a general rule, interest on money borrowed for income producing purposes will be deductible where it is expected assessable income will be derived from the investment.
In your case, you purchased a house with a deposit which was gifted from your parents. You have now obtained a draw down loan against the equity of your house and you propose to use some of these monies to give to your parents as they are getting older and may need the money for themselves.
You will be making a gift to your parents, which is a payment of a private nature. Therefore, the interest on that part of the draw down loan that relates to the gift to your parents is not deductible under section 8-1 of the ITAA 1997.