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Ruling
Subject: Rental property interest
Question
Are you entitled to a deduction for interest on property 1 in excess of the remaining loan amount?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commenced on
1 July 2010
Relevant facts
You had a loan on rental property 1 which was secured by rental property 2.
You sold property 2 and the bank required you to reduce the loan on property 1 with excess funds from the sale.
You really wanted to reduce the loan on your primary residence.
You have refinanced your loans.
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 95/25 provides that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. 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.
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. The character of a new loan which refinances a previous loan follows from that previous loan: Taxation Ruling TR 95/25
You repaid part of an investment loan. While it is accepted that repaying the part of the loan was a requirement of the bank, this does not change the fact that part of the loan was repaid. Any new borrowings of the repaid amount are not for the rental property. Therefore, you are not entitled to a deduction for interest on more than the remaining loan amount for property 1.