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Edited version of private ruling
Authorisation Number: 1011828240263
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Ruling
Subject: Interest expenses - rental property works
Question
Are you entitled to a deduction for your share of the interest incurred on the loan used to fund the works on your rental property?
Answer:
Yes
This ruling applies for the following period
Income year ended 30 June 2011
Income year ended 30 June 2012
Income year ended 30 June 2013
Income year ended 30 June 2014
The scheme commenced on
1 July 2010
Relevant facts and circumstances
You own a property jointly with your spouse which you operate as a rental property, rented at arms length at market rates.
You have undertaken work on this property as follows:
· the erection of a retaining wall to control erosion
· land reshaping (and subsequent re-turfing) to prevent flooding of the building
· re-building and compacting of eroded ground.
The cost of these works was funded by a loan held jointly with your spouse, upon which interest is charged.
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 an interest expense has been incurred in the course of producing assessable income generally depends on the purpose or 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: Taxation ruling TR 95/25.
In the case of a jointly held rental property, these expenses are generally shared proportionate to the ownership interests according to the legal title of the property: Taxation Ruling TR 93/32.
In your situation, you will incur interest on a joint borrowing which is in respect of works undertaken on your jointly held rental property. It is accepted this interest is incurred in respect of an income producing asset (your rental property) and relates to this income producing activity. Accordingly you are entitled to a deduction for your share of the interest incurred on this loan.