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Edited version of your written advice
Authorisation Number: 1013140240529
Date of advice: 16 December 2016
Ruling
Subject: Interest expenses
Question and answer
Are you entitled to a deduction for your share of interest on the re draw of funds from your home loan to purchase a rental property?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
Year ended 30 June 2020
The scheme commenced on:
1 July 2016
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You and your spouse have a home loan.
You intend on repaying part of your home loan and redrawing the money to purchase a rental property overseas.
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 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. Interest incurred on a loan relating to a rental property will generally be deductible.
Taxation Ruling TR 2000/2 examines the treatment and consequences of payments to loans in excess of the required amount and the subsequent redrawing of these funds.
It is considered that a repayment to a loan account in excess of the required amount is a permanent reduction to this debt. Repayments of an amount to a loan do not create a debt due to the borrower, but simply allows the borrower to then draw funds from the loan to an agreed limit. These redrawn funds therefore constitute new lending and as such, the purpose or use of these drawings is relevant.
Where a taxpayer pays money off an existing home loan and redraws funds to purchase an investment property the portion of the interest relating to the borrowed funds for the investment property is deductable.
Example:
Lewis has a home loan of $100,000.
He decides to pay $80,000 off the loan.
A few months later Lewis decides to purchase an investment property.
Lewis redraws the $80,000 from his home loan to purchase the investment property.
Lewis is entitled to claim 4/5 of the interest on the home loan account as a deduction for the investment property.
You are entitled to a deduction for your share of the portion of the interest of the loan which relates to an income producing purpose.