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Edited version of your written advice
Authorisation Number: 1013136861103
Date of advice: 8 December 2016
Ruling
Subject: Loan interest deduction
Question 1
Are you entitled to a deduction for the interest you incur on a loan in respect of the $X drawn from the loan to purchase a rental property?
Answer
Yes
Question 2
Are you entitled to a deduction for the interest you incur on your loan in respect of monies drawn from the loan to reimburse yourself for private funds used to acquire the rental property?
Answer
No
This ruling applies for the following period
Year ending 30 June 2017
The scheme commenced on
1 July 2016
Relevant facts
You will buy a property which you plan to rent out, off the plan.
You will pay the 10% deposit from your own cash savings.
You wish to borrow the full purchase amount and reimburse yourself the private funds used to fund the deposit from this loan.
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.
Whether interest has been incurred in the course of producing assessable income generally depends on the purpose or use to which the borrowed funds have been put. 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.
Therefore, in respect of the monies withdrawn from your rental loan to partially fund the acquisition of the rental property, you are entitled to a deduction for the interest you incur on the rental loan for this portion of the borrowing.
The principle of mutuality provides that you cannot earn income from yourself or lend yourself funds. The funds drawn from your rental loan to reimburse yourself for private funds are not to repay or refinance a borrowing, but to provide for future undefined private expenditure.
Should the rental loan become a mixed purpose loan, such as for drawings made for purposes addressed above, an apportionment of the interest incurred must be made to account for any non-deductible purpose.