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Edited version of private ruling
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Ruling
Subject: interest expenses
Question
Are you entitled to a deduction for the interest expenses you incur on your loan used to acquire an investment property from your spouse?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commenced on
1 July 2011
Relevant facts
Your spouse owned a property which was previously used as your main residence.
You and your spouse are moving into another property to live.
You are purchasing your previous main residence from your spouse at its market value.
You will use the property as an investment property.
You have put the property with a real estate agent and it is currently advertised for rent.
You have borrowed the purchase price of the property. The loan is in your name and the borrowed funds are used for the property only.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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 the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.
The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion.
Accordingly, it follows that if a loan is used for investment purposes from which assessable income is to be derived, the interest incurred on the loan will generally be deductible.
In your case, you will be incurring interest on a loan. The borrowed funds are being used to acquire an investment property. The property is being purchased at market value in an arms length transaction. As the borrowed funds are being used for income producing purposes, the associated interest expenses are an allowable deduction. The fact that you are purchasing the property from your spouse does not change the deductibility of the expense in your specific circumstances. The interest expenses incurred are an allowable deduction under section 8-1 of the ITAA 1997.