| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011799931599
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: Interest deduction
Question
Are you entitled to a deduction for interest incurred on a loan from a family member to purchase your former spouse's share of an investment property?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You and your spouse separated and as part of the property settlement, property was sold and the proceeds divided equally.
In relation to a one jointly owned property, this was being rented out and it was initially agreed your share would be bought by your spouse for half the market value of the property. However, your spouse was unable to obtain finance to allow this to occur.
You then unsuccessfully attempted to sell the property on the open market. Subsequently, you agreed to buy out your spouse's share in the property for slightly less than the price suggested by the original valuation.
At the time of offering to buy out your spouse's share in the property, you did not have sufficient funds to pay the full agreed price. This necessitated you borrowing part of the needed funds.
The property continues to be rented, providing you with assessable income.
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.
Taxation Ruling TR 95/25 provides that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. The use test, established in FC of T v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest and looks at the application of the borrowed funds as the main criterion.
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.
You borrowed funds to purchase your former spouse's share of a rental property. The property continued to be rented since it was purchased and you have received rental income from the property. As such, the interest on the borrowing is considered to be incurred in the course of producing assessable income and is an allowable deduction.