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Edited version of private ruling
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Ruling
Subject: Deductions - Interest expenses
Question and Answer
Are you entitled to claim a deduction for the interest on money borrowed to pay for rental property expenses?
Yes
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2010
Relevant facts and circumstances
You own a number of investment residential rental properties.
The properties are rented to unrelated parties.
The properties are rented at market rate.
You operate a line of credit solely for the management of your properties.
Your line of credit expenses include council rates, waters rates, body corporate annual fees and insurance of the properties.
Relevant legislative provisions
Income Tax Assessment Act 1997
Section 8-1
Reasons for decision
Interest expenses
Interest is deductible to the extent it is incurred in gaining or producing assessable income or in carrying on a business for that purpose and is not of a capital, private or domestic nature (section 8-1 Income Tax Assessment Act 1997). Interest is not normally a capital outgoing because it is a recurrent expense which does not secure an "enduring advantage"; rather, it simply secures the use of borrowed money during the term of the loan.
Lines of credit
Funds drawn down on a line of credit facility or a redraw facility are used only partly for income-producing purposes, interest on the funds is apportioned between the income-producing and the other purposes in accordance with the principles set out in TR 2000/2.
Where a line of credit facility is used for a specific purpose, interest is fully deductible where funds drawn down are to be used exclusively for an income producing purpose. Interest is not deductible where funds drawn are used for a non-income producing purpose.
Your interest expenses accrued for the payment of council rates, water rates, body corporate annual fees and insurance of the investment properties is deductible as the expenses are connected to an income producing purpose.