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Ruling
Subject: Interest deduction on line of credit to pay investment loan.
Question
Is the interest deductible on funds from a line of credit used to pay an interest only investment loan?
Answer
Yes
This ruling applies for the following periods
Year ending 30 June 2013
Year ending 30 June 2014
The scheme commenced on
1 July 2012
Relevant facts
You propose to build an investment property.
Interest only loans and a line of credit will be used to finance the property
Loan A will use the investment property as security and will be interest only.
Loan B will use your own property as security and be used to provide funds for the remainder of the purchase price and initial costs such as purchase costs, legal expenses and inspections etc. Interest only will be paid on the loan and will be paid every billing period.
A Line of Credit (loan C) will use your own property as security and will not be drawn upon until the investment property is handed over. Interest only will be paid in full every billing period. This will be used as an operating account into which all rent will be received and all expenses associated with the investment will be paid such as rates, insurance and repairs. These costs will be capitalised. It will also pay the interest on Loan A.
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.
Whether interest has been incurred in the course of producing assessable income generally depends on the purpose or use to which the borrowed funds have been put.
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. The character of a new loan which refinances a previous loan follows from that previous loan: Taxation Ruling TR 95/25
Compound interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27.
In your situation, you have funded the interest incurred on your rental loan and the expenses in respect of your rental property from your line of credit and incur interest on that line of credit borrowing. Given the above principles, this interest is accepted as being incurred in producing your assessable income and accordingly you are entitled to a deduction for that interest.