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Ruling

Subject: interest expenses

Question

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for all the interest you incur on your rental loan and line of credit?

Answer: No. You must apportion any deduction to exclude interest referable to the private drawings from your line of credit.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced 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 you use as a rental property (rental property A). You have an interest only loan referable to the purchase of this property (rental loan).

You own a property you use as a rental property (rental property B).

You have a line of credit which you use for the following purposes:

· to fund the interest expense incurred on the rental loan

· to meet deductible rental property expenses, including rates, insurance and maintenance for rental properties A and B

· to meet some private expenses including health care, credit card repayments and holidays.

You will direct the rental income from both rental properties to the line of credit.

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 you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature.

Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put.

Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income: Taxation Ruling TR 95/25

Compound (or capitalised) interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27.

Where a borrowing is used for both private and income earning purposes, it is necessary to apportion the interest incurred on this borrowing to exclude the portion of interest referable to the private purpose.

In your situation, it is accepted a portion of the interest on your line of credit is referable to your rental property and income earning investments and therefore incurred in the production of your assessable income. However a portion of the line of credit has also been used to fund private expenditure.

Accordingly you are entitled to a deduction under section 8-1 of the ITAA 1997 only for the interest you incur on the line of credit which is referable to the interest incurred on your rental loan and your deductible rental expenses.