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Edited version of private advice
Authorisation Number: 1012649950525
Ruling
Subject: Rental expenses
Question
Are you entitled to a full deduction for the interest incurred on your investment loan?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
The scheme commenced on
1 July 2013
Relevant facts
You have a $XXX investment home loan which has been used for the purchase of an investment property.
You intend to refinance the loan by taking out an investment home loan for $XXX and place $XX in an offset account.
The offset account will only offset the new loan.
All of your rental income will be deposited into the offset account and all of your investment property expenses will come out of the offset account.
You plan on paying some of the loan down in a few years.
You do not intend on extending the loan or making any redraws after repaying any of the 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 a losses or outgoings to the extent that they are incurred in gaining or producing assessable income, except where the losses or outgoings are of a capital, private or domestic nature.
Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith 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. Where borrowed funds are used to acquire an income producing asset (for example, a rental property), the interest on the borrowed moneys is considered to be incurred in gaining or producing assessable income.
It is accepted that expenses incurred to reduce other expenses associated with the income earning activity are also deductible.
A taxpayer with an acceptable loan account offset arrangement with dual accounts is entitled to claim a deduction for the full amount of interest actually incurred on the loan account whilst the loan is used wholly for income producing purposes.
In your case you are entitled to deduct the full amount of the interest incurred on your new loan account as the loan is used for purposes associated with the income producing property and will not be used for any personal purposes.