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Edited version of your written advice
Authorisation Number: 1012928750129
Date of advice: 16 December 2015
Ruling
Subject: Rental interest expense
Question 1
Are you entitled to claim a deduction for interest expense incurred on a line of credit taken out to pay investment property expenses?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
You intend to purchase an investment property.
The funds used to purchase the property will be from a loan for the purchase price of the property, and a line of credit.
You intend to use the line of credit to pay for the investment property expenses including council rates, body corporates, water rates, insurance and interest 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. Further, interest on a new loan used to repay an existing investment loan will generally also be deductible as the character of the new loan is derived from the original borrowing.
Taxation Ruling TR 2000/2 contains the Commissioner's view on the deductibility of interest with regards to line of credit and redraw facilities. We consider draw-down from a line of credit account or sub account, or a redraw from a loan account, is a separate borrowing. To the extent borrowings are used for income producing purposes, that part of the accrued interest attributable to those borrowings is deductible. Conversely, that part of the accrued interest attributable to borrowings for non-income producing purposes is not deductible.
In your case, you intend to take out a line of credit facility for your investment property. You will pay expenses, such as council rates, body corporates, water rates, insurance and interest expenses incurred in relation to your investment property using the line of credit.
Interest is fully deductible where funds drawn down on an investment account are used exclusively for an income producing purpose. Accordingly, the interest you incur on the line of credit will be deductible under section 8-1 of the ITAA 1997.