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Edited version of your written advice
Authorisation Number: 1012695047500
Ruling
Subject: Rental property expenses
Question
Are you entitled to a deduction for debt interest on loans used to fund the purchase of an investment property?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts
Loan A is used to purchase an investment property.
It equates to X% of the purchase price of the investment property.
Loan B is a line of credit that was used to make up the shortfall between Loan A and the investment property price and to pay for the associated settlement costs including stamp duty, legal fees etc. It also pays the debit interest on Loan A.
Loan B is the recipient account for the investment rental income received from the investment property.
The rental income does not cover the full amount of debit interest on Loan A and B.
Consequentially, the principal amount increases as it approaches its approved credit limit.
You intend on borrowing further funds to cover the difference between the debit interest and rental income.
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 you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature.
Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put.
Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income: Taxation Ruling TR 95/25
Compound (or capitalised) interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27.
In your situation, it is accepted you're Loan A and B are referable to your rental property. Likewise any additional borrowings you take out to fund the debt interest will also be referable to your rental property. Accordingly you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest you incur on this loan.