Edited version of your private ruling

Authorisation Number: 1012392821260

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 expenses

Question:

Are you entitled to a deduction for the interest expenses you incur on your loan when the property becomes available for rent?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on:

1 July 2012

Relevant facts

You and your partner own a property that is currently your main residence.

The loan for the property is in both your names.

You wish to purchase your partner's 50% ownership in the property.

You will purchase the share of the property based on the current market value.

The title deed of the property will be changed to show your name only as the owner.

You will take out a new loan in your name only. The borrowed funds from the new loan will be used to pay out your portion of the previous loan and an additional amount to cover the purchase of your partner's share in the property.

You and your partner intend to move out of the property.

You then intend to use the property as a rental property. The property will be rented at a commercial rate.

You are hoping to have the property rented after 1 January 2013.

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) 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 the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.

The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion.

Accordingly, it follows that if a loan is used for investment purposes from which assessable income is to be derived, the interest incurred on the loan will generally be deductible. 

In your case, you will be incurring interest on a loan where the funds are used to acquire your full ownership in a property. You currently own a 50% share in the property and are borrowing further funds to purchase the additional 50% share in the property. The 50% share of the property is being purchased at market value in an arms length transaction. You will then use the property for rental. 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 50% of the property from your partner does not change the deductibility of the expense in your specific circumstances. The interest expenses incurred will be fully allowable as a deduction under section 8-1 of the ITAA 1997 when the property is available for rent.