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Edited version of private ruling
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Ruling
Subject: Interest deduction
Question
Are you entitled to your half share of interest and borrowing expenses on a loan to purchase two-thirds of a rental property?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
Three of your family members inherited a house.
Two of your family members did not want to keep their share of the property and sold it to you at market value. One family member retained their share of the property.
You took out a loan to fund the purchase of two-thirds of the property.
You also incurred borrowing expenses.
The property is rented at market rates.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-25
Reasons for decision
Interest expenses are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that they are incurred in gaining or producing assessable income except to the extent that the expense is of a capital, private or domestic nature.
Section 25-25 of the ITAA 1997 allows a deduction for the expenses incurred in borrowing money where that money is used to produce assessable income. If the total cost of borrowing expenses is over $100, the deduction is spread over 5 years or the term of the loan, which ever is the lesser.
Taxation Ruling TR 95/25 deals with the general principles governing deductibility of interest following the decision of the Full Federal Court in FC of T v. Roberts; FC of T v. Smith 92 ATC 4380; (1992) 23 ATR 494.
TR 95/25 provides that the deductibility of interest is determined by the use to which the borrowed money is put. The use test is the basic test for the deductibility of interest and looks at the application of the borrowed funds as the main criteria (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153).
In your case, you took out a loan to purchase two-thirds of a rental property and also incurred borrowing expenses on the loan.
The loan is used for income producing purposes. Therefore, you are each entitled to claim your 50% share of the interest on the loan. You are also entitled to claim 50% of the borrowing expenses spread over five years.