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Edited version of private ruling
Authorisation Number: 1011759809034
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Ruling
Subject: Capital gains tax and loan/investment property expenses
Question 1
Will using your main residence as security for the investment property effect your entitlement to the main residence exemption?
Answers
No
Question 2
Are you entitled to claim expenses in relation to the loan and investment property?
Answers
Yes
This ruling applies for the following period
Year ended 30 June 2011.
Year ended 30 June 2012.
The scheme commenced on
1 July 2010
Relevant facts
You currently own a property that is your main residence.
You intend to use your main residence as security for another loan that will be used to purchase an investment property
The loan for the investment property will be separate from the loan for your main residence.
You intend to claim expenses in relation to the loan and investment property.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 8-1
Income Tax Assessment Act 1997 - Section 25-25
Income Tax Assessment Act 1997 - Section 40-25
Income Tax Assessment Act 1997 - Section 118-110
Reasons for decision
Main residence exemption
The main residence exemption allows a taxpayer to disregard a capital gain or loss that is made from a capital gains tax (CGT) event happening to a dwelling that is the taxpayer's main residence.
For a taxpayer to qualify for the full exemption from CGT:
· the taxpayer must be an individual,
· the dwelling must have been the taxpayer's home,
· the dwelling was the taxpayer's main residence for the entire ownership period, and
· the taxpayer's main residence was not used to produce assessable income during the ownership period.
In this case, using your main residence as security for the loan on your investment property will not affect your right to disregard a capital gain or loss made on your main residence.
Expenses - interest, bank charges, council rates and land tax
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for losses and outgoings that are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.
In this case you will be allowed a deduction for the interest, bank charges, council rates and land tax that are incurred in producing assessable income in relation to the investment property.
Expenses - stamp duty and mortgage insurance
Section 25-25 of the ITAA 1997 provides that a taxpayer can deduct expenditure incurred in borrowing money to the extent that those funds are used for the purpose of producing assessable income.
In this case the stamp duty and lenders mortgage insurance will be expenditure incurred in relation to borrowing money for the investment property which will be used to produce assessable income and therefore will be allowable deductions.
When the amount for borrowing expenses is less than $100 a deduction for that amount can be made in the income tax year that it is incurred. Where the amount of the borrowing expenses exceeds $100 and the period of the loan is greater than five years, section 25-25 of the ITAA 1997 provides that the deduction for the borrowing expenses be apportioned over five years starting from the day the loan begins.
Expense - depreciation
A taxpayer is entitled to a deduction for the decline in value of a depreciating asset that the taxpayer held for any time during the year under section 40-25 of the ITAA 1997. The deduction is only available in relation to the use of the asset for taxable purposes.
In this case you will be allowed a deduction for depreciation on assets used in relation to producing assessable income from the investment property.