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Edited version of private ruling
Authorisation Number: 1011718329280
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Ruling
Subject: Rental property - Deductions
Questions
1. Are you able to treat all payments made to your mortgage solely referable to reducing the amount of the loan used to purchase your current residence?
Answer: No
2. Are you able to treat the lump sum payment you receive from retirement as solely referable to reducing the amount of the loan used to purchase your current residence?
Answer: No
This ruling applies for the following period
Financial year ending 30 June 2011
The scheme commences on:
1 July 2007
Relevant facts and circumstances
You purchased a property (property A) which was your main residence.
You purchase another property (property B).
You rented property A after you purchased property B which became your main residence.
You increased your existing mortgage in order to purchase property B.
Relevant legislative provisions
Section 8-1 of the Income Tax Assessment Act 1997
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, or relate to the earning of exempt income.
Where a loan is originally set up to purchase a main residence, the interest expenses incurred are private and are not deductible. However, from the time the property is used to gain or produce assessable income, interest on the loan would become deductible only to the extent that the loan remains attributable to the property.
The deductibility of interest on any further borrowing depends upon the use to which the funds are put. Where the original borrowing is for income producing purposes and the taxpayer borrows further funds wholly or partly for non-income producing purposes, that part of the accrued interest attributable to the additional funds used for non-income producing purposes is not deductible.
Where a taxpayer uses a loan for different purposes the loan account becomes a mixed purpose account and there is an ongoing need to apportion interest. That apportionment needs to be made on a fair and reasonable basis. Subsequent repayments are apportioned between the outstanding debt used at that time for income producing and non-income producing purposes.
You increased your existing mortgage when you purchased Property B. You have rented Property A out and now use Property B as your main residence. The loan account is therefore a mixed purpose account and therefore there is an ongoing need that you apportion the repayments in a fair and reasonable basis when they are made.