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Ruling
Subject: Deductibility of interest
Question and answers:
Are you entitled to deduct the interest expenses that you will incur on a loan for an investment property purchased from your spouse?
Yes.
This ruling applies for the following period
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commenced on
1 July 2010
Relevant facts
Your spouse owns an investment property.
You intend to purchase the investment property from your spouse at market value.
You intend to obtain an interest only loan from a bank to finance the purchase of the investment property.
All funds from the loan will be exclusively used for the purchase of the investment property.
The investment property is currently and will continue to be leased out at arms length through a real estate agent.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital, private or domestic in nature or relates to the earning of exempt income.
Taxation Ruling TR 95/25: Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith, provide the Commissioners 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. Accordingly, where borrowed funds are used for income producing purposes the interest on those funds is deductible.
In your case, you intend to take out an interest only loan with the view of purchasing your spouse's investment property. The funds from the loan will be used exclusively for the purchase of the investment property and the investment property will continue to be used for the purpose of producing assessable income.
Accordingly, you are entitled to a deduction for the interest expense that you will incur, under section 8-1 of the ITAA 1997.