Edited version of private ruling

Authorisation Number: 1011911212342

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Ruling

Subject: Rental Property - Deductions - Interest

Question

Are you entitled to a deduction for the interest expense you incur on the portion of the borrowing which relates to your rental property, from the time it was made available for rent?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You own a property which was your main residence (Property 1). You had a borrowing in respect of this property.

You bought another property (Property 2).

Your intention was to sell Property 1.

You moved from Property 1 to Property 2, meaning Property 2 became your main residence.

As you were unable to sell it, you rented out Property 1. The property was available for rent during June 2011, and was actually rented during July 2011.

The purchase of Property 2 was funded by a new borrowing. Part of this new borrowing was also used to refinance your existing Property 1 borrowing.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

You are entitled to claim a deduction for the interest expense you incur on the portion of the borrowing which relates to your rental property, from the time it was made available for rent.

Detailed reasoning

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. The use test is the basic test relied upon to establish the deductibility of interest and looks at the application of the borrowed funds as the main criterion. With regards to borrowings relating to a rental property, the interest will be deductible to the extent that the property is used to produce assessable income, such as in the form of rental income, from the time the property is rented or made available for rent.

Further, interest on a new loan used to repay an existing loan will generally also be deductible as the character of the new loan is derived from the original borrowing.

Taxation Ruling TR 2000/2 considers the deductibility of interest where the borrowed money has been applied for both income producing and non-income producing purposes (a mixed-purpose loan). Where the borrowed funds are put towards income-producing and non-income-producing uses, the interest expense needs to be apportioned between the different uses on a reasonable basis.

In your case you took out a loan to purchase Property 2, a portion of which also refinanced the loan over Property 1. As this new loan is a mixed purpose loan, the interest must be apportioned between the different purposes. The first purpose is in respect of Property 1 which is an income producing asset. The second purpose is in respect of Property 2 which is your residence.

The interest expense is deductible from the time the property was made available for rent, which was during June 2011.

It is accepted that the amount paid out when you refinanced Property 1 is the proportion of the borrowing relating to this property. It would be reasonable to attribute the interest on this amount to be for an income producing purpose, therefore deductible under section 8-1 of the ITAA 1997.