Edited version of your private ruling

Authorisation Number: 1012033044769

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Ruling

Subject: Interest expenses

Questions

Do you have to apply the rent from an investment property towards the investment loan or can you nominate where the rent from the investment property can be applied to a non investment loan or an offset account?

Answer: This is not a valid question as it is not in respect of a relevant provision.

Are you entitled to a deduction under 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for all the interest you incur on your loan used to acquire your 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 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 your principal place of residence (your home).

You will purchase a block of land on which you will build a rental property (your rental property).

You will obtain new borrowings which you will use to fund the acquisition of the land, the construction of the rental property and additional costs referable to the rental property. Part of these new borrowings will be secured by your home.

You will direct the rental income from your rental property to the loan referable to your home.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Rental income

A private ruling provides the Commissioner's view on how a relevant provision applies to a defined arrangement. You have asked if there is any problem with directing all rental income to your private sub-account, however this question is not in respect of a relevant provision. Accordingly the question is not a valid question and the Commissioner may not make a ruling in this regard.

Interest expenses

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. The security provided as a surety against such a borrowing is not relevant for the purposes of determining the use of that borrowing: TD 93/13.

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.

Accordingly you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest you incur on the borrowings which are referable to your rental property.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you have asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. However, on the presented facts, we consider that your circumstances do not show features that would distinguish your facts from those described in Taxation Determination TD 2011/D8. Accordingly, it is considered that the conclusion in the Taxation Determination may be relevant to you.

TD 2011/D8 considers how the general anti-avoidance provisions would apply to certain investment loan arrangements. You may wish to review this document (available from our website - see below) and consider its relevance to your situation.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.