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Edited version of private advice
Authorisation Number: 1012636921514
Ruling
Subject: Interest expense
Question
Are you entitled to an interest deduction?
Answer:
No
This ruling applies for the following period
Year ending 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You were given a commercial property which is unencumbered.
You used the property to secure a loan to buy your residential home.
You wish to transfer the residential home loan to the commercial property and claim a deduction for the interest.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income.
Taxation Ruling TR 95/25 considers the deductibility of interest. 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. The 'use' test, established in Federal Commissioner of Taxation 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. The interest will be deductible to the extent that the property is used to produce assessable income.
In your case, the original loan is used for private purposes. The commercial property was gifted to you, unencumbered. Transferring the loan to an unencumbered property does not change the use of the funds as you are not funding that property. The loan amount is still used for private purposes as the use of the loan has not altered - it is still to purchase your residential property. No deduction for the interest would be allowable as the funds would continue to be used for private purposes.