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Edited version of your written advice
Authorisation Number: 1012915539738
Date of advice: 24 November 2015
Ruling
Subject: Rental interest expense
Question
Are you entitled to a deduction for interest expenses paid by you on a loan in your spouse's name where the funds are used solely to purchase an investment property in your name only?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2015
Relevant facts and circumstances
You intend to purchase an investment property.
The funds to be used to purchase the property are to be redrawn from your current investment loan, and also redrawn from your spouse's residential loan.
The property will be solely in your name.
You intend to pay for the loan for both you and your spouse from PAYG wages, and rental income from your existing rental property and the new rental property.
You will be declaring all income from the rental property and your spouse will not be declaring any income or claiming any expenses.
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 the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.
The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion.
Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible.
In your case, you intend to redraw funds from your investment loan in order to purchase an additional rental property. Your spouse will redraw funds from a residential loan in order to fund part of the purchase of the rental property. You will be the sole owner of the rental property and you will incur interest on money borrowed to acquire the property.
As the borrowed funds are being used to acquire an investment property for income producing purposes, the associated interest expenses are an allowable deduction. The fact that part of the funds used to purchase the property will borrowed in your spouse's name does not change the deductibility of the expense in your specific circumstances. The ATO regards the redraw made by your spouse as merely a loan to you as part of a private arrangement and this will not affect the legal ownership of the property. Therefore the interest expenses incurred are an allowable deduction under section 8-1 of the ITAA 1997.