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Edited version of private ruling
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Ruling
Subject: interest expenses
Question
Are you entitled to a deduction for the interest you incur on your line of credit in addition to claiming a deduction for the expenses funded by the line of credit?
Answer:
Yes
This ruling applies for the following period
Income year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts and circumstances
You own a rental property.
You obtained a loan (rental loan) to assist with the funding of the purchase of your rental property. Loan A was used solely for the acquisition of your rental property.
You have obtained a line of credit (LOC).
This LOC is used for the following purposes:
· to fund the ongoing expenses in respect of your rental property, including rates and insurance
· to fund the monthly repayments for your rental loan.
You do not use the LOC for any private purpose.
You incur interest on the LOC.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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.
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.
It is accepted the other expenses incurred in respect of the rental property, such as rates and insurance, are also deductible.
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 95/25.
Compound interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27.
In your situation, you will incur interest on the LOC, the principal of which is comprised of repayments on your rental loan, expenses relating to the rental property and income producing shares. It is accepted that this interest is in respect of the production of your assessable income and accordingly you are entitled to a deduction for the interest you incur on your LOC.
The fact the LOC funded the payment of the deductible rental expenses does not effect the deductibility of these expenses.