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Edited version of your written advice
Authorisation Number: 1012719318688
Ruling
Subject: Interest expenses
Question
Are you entitled to a deduction for the interest expenses incurred?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You purchased an investment property.
On several dates in the last few years a relative loaned you money to either:
a) Enable you to purchase the investment property
b) Temporarily reduce your loan so that the interest repayments would be lower and therefore your repayments would pay off a larger proportion of the original loan
You would like to withdraw excess funds from the investment property loan to repay some or all of these loans.
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 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.
Taxation Ruling TR 95/25 provides that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. The use test, established in FC of T 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.
Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income.
In your case, you borrowed money from a relative to allow you to purchase an investment property and to reduce the interest charged on your investment property's home loan. You are now looking to repay the loans by withdrawing excess funds from the investment property loan.
You used the loans from your relative to help fund the purchase of an asset that you use to earn assessable income and to reduce the interest payable in relation to that asset. It is clear that these borrowed funds were used in relation to your income earning activity. You now wish to withdraw excess funds from your investment property loan to repay these borrowings. It is considered that the amounts withdrawn for this purpose are also used in relation to your income earning activity. Therefore, the interest on the amounts withdrawn for this purpose is considered to be incurred in the course of producing assessable income and is deductible under section 8-1 of the ITAA 1997.