Edited version of private ruling

Authorisation Number: 1011712175275

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Ruling

Subject: Interest deductions on refinanced loans

Question and Answer

Are you entitled to claim a deduction for the whole of the interest incurred on the further refinanced investment loan?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You and your spouse originally had split borrowings with a financial institution. These borrowings included a loan for rental property investment purposes and a loan for private purposes.

You and your spouse refinanced the loan through another financial institution. Under the refinancing the new financial institution incorrectly bundled the two loans along with relevant changes and disbursements into a single loan facility. This resulted in the single loan having a deductible portion and a non deductible portion.

It was not you or your spouse's intention or purpose to have the loans combined in this manner, however due to the lead up to a holiday period the process was rushed and finalised.

You and your spouse now wish to further refinance and split this loan into separate loans for the purposes of returning the loan structures to their correct positions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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, go to our website 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.

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.

Taxation Ruling TR 95/25 considers the general deductibility of interest expenses. The following general principles, identified in TR 95/25, are relevant to the question of whether interest is deductible under section 8-1 of the ITAA 1997:

· there must be a sufficient connection between the interest and the activities which produce assessable income; and

· the objective circumstances of the use to which borrowed funds are put by the borrower must be considered to ascertain the character of the interest on money borrowed.

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. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. Further, interest on a new loan used to repay an existing loan will generally also be deductible as the character of the new loan is derived from the original borrowing.

Taxation Ruling TR 2000/2 provides the Commissioners views on the deductibility of interest on drawings against a line of credit or redraw facility.

Paragraph 15 of TR 2000/2 states that were a taxpayer has a mixed purpose sub account, the interest needs to be apportioned between the income producing and non income producing purposes.

Paragraph 18 considers a situation where a taxpayer refinances a debt outstanding on a mixed purpose loan by borrowing an equivalent amount under two separate accounts or sub-accounts. If the amounts borrowed under those two separate accounts are equivalent to the respective income producing and non income producing parts of the existing outstanding debt, the Commissioner accepts that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible.

Application to your circumstances

You and your spouse previously had two separate loans with a financial institution. One loan was for income producing purposes and another loan was for private purposes.

These loans were inadvertently combined during a refinancing venture with another financial institution. As a result you and your spouse ended up with a mixed purpose loan and were required to apportion the interest between the income producing and non income producing portions of the loan.

You and your spouse are now wishing to refinance and split the loan into separate loans in order to return the loan structures to their correct positions. In accordance with paragraph 18 of TR 2000/2 you will be entitled to a deduction for the whole amount of interest incurred on the separated loan that relates to the rental property.