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Edited version of your private ruling
Authorisation Number: 1012521980716
Ruling
Subject: rental property expenses
Question
Can you claim a deduction for interest charged on a loan to purchase an investment property, where the loan is drawn against your main residence?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You purchased an investment property which settled in the 2013-14 financial year.
As there was a shortfall in the loan proceeds supplied by your financial institution, you redrew funds from the existing loan on your main residence to complete the settlement.
You are being charged interest on this loan.
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, or relate to the earning of exempt income.
Taxation Ruling TR 95/25 deals with the general principles governing deductibility of interest under section 8-1 of the ITAA 1997.
To establish that there is a sufficient connection between incurring an interest expense and the gaining or producing of assessable income, regard must be given to all the circumstances including the use to which the borrowed funds are put.
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 to the application of the borrowed funds as the main criteria.
In your case, the purpose of borrowing the funds was to complete the purchase of your income producing property. As the prime purpose of borrowing the funds was therefore to produce assessable income, the interest charged will be deductible. It is not relevant what security is used for the loan, only the purpose to which the funds are applied.