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Ruling

Subject: Deduction-interest.

Question 1:

Are you entitled to a deduction for the interest expenses on loan A when your property is use for income producing purposes?

Answer: Yes.

Question 2:

Are you entitled to a deduction for the interest expenses on loan A for the funds invested into a Self Managed Superannuation Fund (SMSF)?

Answer: No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts

You purchased a property and borrowed from fund (loan A) from a financial institution.

You currently reside in this property.

You currently have a new home under construction in which you intend to reside.

You intend to rent out your current main residence and moved into your new home in the future.

You have not redrawn any funds from loan A.

You are currently making repayments to loan A.

Loan A will have an outstanding balance when your main residence becomes available for rent.

You operate a business and have set up a self managed superannuation fund.

You are not an employee of the business.

You intend to redraw funds from loan A and deposit these funds into a SMSF as a
non-concessional lump sum contribution.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 section 25-25.

Income Tax Assessment Act 1997 section 26-80

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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, relate to the earning of exempt income or are excluded by another provision of the taxation legislation.

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

Any redraws under a line of credit facility will represent new borrowings and the purpose or use of these redrawn funds will determine the character of these redrawn funds. In examining the use of borrowings, there may be instances where a loan has a mixed purpose. Where there is a mixed purpose, only the interest of the portion of the borrowing which is attributed to an income producing purpose is deductible (Taxation Ruling TR 2000/2).

Rental property expenses

In your case, it is accepted that the interest on the portion of loan referable to your property, from the time the property becomes available for rent, will be incurred in producing your assessable income. Therefore, you can claim a deduction for these interest expenses upon the property becoming available for rent.

Contributions to SMSF

Section 26-80 of the ITAA 1997 deals with financing costs on loans used to pay superannuation contributions. This section denies a deduction for interest and other borrowing expenses incurred in relation to a loan or other financing arrangement that is used to finance personal superannuation contributions unless you are entitled to a deduction for your superannuation contributions under Subdivision 290-B of the ITAA 1997, which relates to employer superannuation contributions (personal superannuation contributions are contained in Subdivision 290-C of the ITAA 1997).

In your case, you operate a business as a sole trader and intend to borrow money to contribute to your SMSF to provide you with additional retirement income. As you are not an employee of your business nor are you your own employer you are not entitled to deduct your personal superannuation contributions under Subdivision 290-B of the ITAA 1997. Accordingly section 26-80 of the ITAA 1997 prevents your entitlement to a deduction for the interest which may otherwise be deductible under either section 8-1.

Conclusion

Only the interest incurred on the portion of the loan referable to your property is attributed to an income producing purpose and is therefore deductible under section 8-1 of the ITAA 1997.