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Edited version of your private ruling
Authorisation Number: 1011998607063
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Ruling
Subject: Interest expenses
Question
Are you entitled to a deduction for interest on a loan after the rental property was sold?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commences on:
1July 2010
1 July 2010
Relevant facts and circumstances
You purchased and rented an investment property for a number of years.
The property was financed with a financial institution and the loan was constructed to cover principal and interest.
Your loan was exclusively obtained for the purpose of the investment and never extended.
You sold the property due to the downturn in the market and the difficulty in finding tenants.
Funds from the sale of the property were directed to the loan.
There were insufficient funds from the sale to completely pay out the loan.
You do not have the capacity to repay the loan out at this stage.
You have arrangements in place to make weekly payments which may repay the loan over a number of years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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 2004/4 examines the deductibility of interest after the cessation of the income earning activities. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period.
However, the nexus between the interest expense and the relevant income earning activities will be broken where:
§ you have the ability to repay the loan but choose not to
§ you make a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt.
In your situation, it is accepted that the interest you incur resulted from a loan left after the funds from the sale of the investment property were expended.
You do not have the ability to repay the loan in a lump sum and it is not a conscious decision to extend the loan. Accordingly, you are entitled to a deduction for the interest on the residual borrowings relating to the loan for the sold investment property.