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Edited version of private advice
Authorisation Number: 1012678793258
Ruling
Subject: Rental property interest expense post sale of property
Question
Are you entitled to a deduction for interest incurred on a rental property loan after the cessation of the income earning activity?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You borrowed funds from a bank to fund the purchase of a rental property.
The rental property was available for rent during the entire period of ownership.
The proceeds from the sale of the property in were used to reduce the balance of the loan. However the property was sold at a loss and was insufficient in paying the liability of the loan off in full.
You are not in a position to pay off the remainder of the loan; as such the remaining balance is to be paid off over a number of years.
The purpose of the loan has not changed and funds were not used for any other purposes.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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.
Interest expenses are generally deductible under section 8-1 of the ITAA 1997 to the extent that it is incurred in relation to funds used for an income producing purpose.
The Commissioner's view on whether interest deductions are allowable after the cessation of the relevant income producing activity is outlined in Taxation Ruling TR 2004/4. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period.
However, the nexus between the interest expense and the relevant income earning activities will be broken where:
• you have the ability to repay the loan but choose not to
• you make a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt.
In your case you were not in a position to pay off the remainder of the loan upon the sale of your rental property and have only kept the loan afoot for this reason. The purpose of the loan has not changed and funds have not been used for any other purposes. Accordingly, the interest you incur results from a failed income producing investment and the occasion of the expense is found in the production of the income of the investment.
Therefore, you are entitled to a deduction for the interest on the residual borrowings relating to the investment under section 8-1 of the ITAA 1997.