Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012055849460

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Interest deductions

Question

Are you entitled to a deduction for interest on a loan you will be taking out to acquire your spouse's share of the property?

Answer

Yes.

This ruling applies for the following period

Year ending 20 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You own a residential property jointly with your spouse.

This property has been used for private purposes.

You now wish to buy out your spouse's share of the property and use it as a rental property, on an arms length basis.

You will take out an additional loan of 50% of the market value of the property, based on a sworn valuation.

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.

Taxation Ruling TR 95/25 provides that the deductibility of interest is determined by the use for which the borrowed money is put. The use test looks to the application of the borrowed funds as the main criteria (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153). Where borrowed funds are used for investment purposes such as the acquisition of a rental property, the interest will be deductible to the extent that the property is used to produce assessable income.

In your case, you will be incurring interest on a loan which you will obtain to acquire the other half share in a property that will be rented out on an arms length basis. The half share in the property is being purchased at market value. As the borrowed funds are being used for income producing purposes, the associated interest expenses are an allowable deduction.

The fact that you are purchasing the half share in the property from your spouse does not change the deductibility of the expense in your circumstances. The interest expenses incurred are an allowable deduction under section 8-1 of the ITAA 1997.