| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your private ruling
Authorisation Number: 1011946174768
This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.
Ruling
Subject: Rental property expenses
Question
Are you entitled to a deduction for interest on a loan used to purchase your spouse's share of a rental property, when it becomes available for rent?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You and your spouse purchased a property as joint tenants.
The property was your main residence until your spouse has purchased a new property, and together you have made this your primary residence.
You are considering retaining the previous residence as a long term rental. To do this you will take out a loan of to purchase your spouse's 50% interest in your previous residence and pay off your previous loan.
You will rent the property through commercial third party arrangements at market rates.
The property will be negatively geared.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1,
Reasons for decision
Interest deduction
Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income.
Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in FC of T v Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. The interest incurred will be deductible to the extent that the property is used to produce assessable income, that is, when it is rented or available for rent.
Taxation Ruling TR 95/33 discusses the relevance of subjective purpose, motive or intention in determining the deductibility of losses or outgoings.
A common practice in relation to the acquisition of income producing assets is known as 'negative gearing'. An inherent feature of negatively gearing an asset is that the interest payable on the funds borrowed to acquire the asset exceeds the income derived from the asset, at least in the initial years of ownership.
In your case, you are going to take out a loan to purchase your spouse's share in a property which you are going rent out. Therefore you are entitled to a full deduction for the interest you will incur on the property, once it has become available for rent.