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Ruling

Subject: Loan interest deductibility

Question

Are you entitled to claim a deduction for your share of the interest on the loan used to purchase your former private dwelling when it is now used as 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

You are a joint owner of a property which was your family home.

The property was purchased with funds from a joint loan.

You were a joint holder of an offset bank account linked to the loan account for this property.

You used the funds in the offset account to purchase a new property which is now your principal place of residence.

Your former residence is now a rental property.

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 a deduction for losses or outgoings to the extent that they are incurred in gaining or producing assessable income, except where the losses or outgoings are of a capital, private or domestic nature.

Taxation Ruling TR 95/25 considers the deductibility of interest. 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. Where borrowed funds are used to acquire an income producing asset (for example, a rental property), the interest on the borrowed moneys is considered to be incurred in gaining or producing assessable income.

The deductibility of the interest paid on the loan to purchase a property depends on the use to which the property is put. When the property is not income producing, as in the case of your private residence, interest paid on the loan is not deductible.

When the property is income producing, as in the case of a rental property, interest paid on the loan is deductible.

The fact that you had used an offset account does not alter the deductibility of any interest paid on the loan.

The amount of the loan did not alter, and the use of the offset account merely meant that you did not pay interest on the loan to the amount of funds in the offset account.

Property and loan held in joint names

Taxation Ruling TR 93/32 considers the division of net income or loss between co-owners of a rental property. TR 93/32 states that net income or loss from a rental property must be shared according to the legal interest of the owners, except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title. Legal interest is determined by the legal title to a property.

Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration - e.g., A and B, who each own an identical 50% share in a property are, provided the other requisite features are present, joint tenants of that property.

In your case, you and your spouse share the legal title of the investment property jointly. There is nothing to suggest that the equitable interest is different to that of the legal title. As discussed above, the net income or loss from an investment property is distributed according to legal title. Therefore, you are entitled to claim half of the interest paid on the loan while the property is income producing under section 8-1 of the ITAA 1997.