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Edited version of your private ruling
Authorisation Number: 1012515111003
Ruling
Subject: Rental - deductions (repairs, capital works, interest, borrowing expenses)
Question
Are you entitled to claim a deduction for the cost of interest incurred on funds borrowed to acquire a property from your relative?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You and your relative have agreed to transfer your relative's property to yourself.
Your relative previously used the property as their place of residence.
You will borrow 100% of the market value of the property from the bank for the transfer.
The full amount that you borrow will be transferred to your relative.
The loan will solely be in your name.
The property will be used as a rental property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) you can claim a deduction for expenses to the extent to which they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
No deduction is allowed for expenses to the extent to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income.
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 provides that the deductibility of interest is determined by the use for which borrowed money is intended, it is essentially a question of fact.
It is the use of the funds borrowed that is relevant. Where borrowed funds are used for private purposes, such as the acquisition of a home, the interest will not be deductible even if there is a secondary result that other assets are able to be retained for the purpose of producing assessable income.
Where a loan contains mixed purposes, you are entitled to a deduction only for the portion of the interest of a loan which relates to an income producing purpose.
In your case, you propose to borrow money in order to purchase your relative's property at market value. As the property will become an income producing asset, you will be entitled to a deduction for the interest you will incur on the loan.