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Ruling
Subject: Eligibility to claim deduction for interest payments
Question
Are you entitled to a deduction for interest payments on your new loan, upon your home being made available for rent?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
07 November 2011.
Relevant facts and circumstances
You and your spouse have joint tenant ownership of a property with a current market value of approximately $1.3 million, which you currently use as your family home (your home).
You have a loan referable to your home of approximately $300,000 which is held in you and your spouse's names (your current home loan).
You will purchase your spouse's share of your home, resulting in you being sole owner of your home.
You will obtain a new loan in your name solely comprising of the following amounts:
· an amount equal to half the market value of your home which you will use to fund your purchase of your spouse's share of your home
· an amount to refinance your share of your current home loan
Your spouse will repay their share of the current home loan from the proceeds received from the sale of their share of your home.
Your current home loan will be fully repaid from your refinance of your share and your spouse's repayment (as detailed above).
You will then make the house available for rent, with you and your family relocating to a new family home.
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) provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature.
Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed 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 deductable to the extent that the property is used to produce assessable income.
In your case, you will be incurring interest on a loan referable to your existing interest in your home and to your acquisition of a further interest in your home, which you will make available for rent. As the borrowed funds will be used for income producing purposes, the associated interest expenses are an allowable deduction.
The fact that you are purchasing the property from your spouse does not change the deductibility of the expense in your specific circumstances. The interest expenses incurred are an allowable deduction under section 8-1 of the ITAA 1997.