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Edited version of private advice
Authorisation Number: 1012647243049
Ruling
Subject: deductibility of interest - purchase additional ownership share in rental property
Question
Are you entitled to a deduction for the interest you will incur on a loan obtained to increase your ownership share in a jointly owned rental property from your spouse?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
The scheme commences on
1 July 2014
Relevant facts and circumstances
You own a rental property jointly with your spouse.
The property is currently let to tenants.
You have obtained an independent valuation of the property.
You intend to obtain a loan to purchase part of your spouse's share in the property. The loan will be in your name only.
Your spouse will use part of the sale proceeds to reduce your joint non-deductible loan on your main residence.
You will continue to let the property to tenants.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
You are entitled to a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature (section 8-1 of the Income Tax Assessment Act (ITAA 1997)).
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 the borrowing is considered to be incurred in the course of producing assessable income.
In your case you will incur interest on money borrowed to increase your ownership share in a rental property. As the borrowed money will be used to increase your ownership share of an income-producing asset you are entitled to a deduction for the interest incurred on the borrowings under section 8-1 of the ITAA 1997. The fact that your spouse will use proceeds he receives from the sale to reduce the joint non-deductible loan for your main residence does not alter the deductibility of the interest.