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Edited version of your written advice
Authorisation Number: 1051215790085
Date of Advice: 4 May 2017
Ruling
Subject: Rental property expenses
Question and answer
Will you be entitled to claim a deduction for the interest paid on an equity loan/line of credit used to pay deductible rental property expenses?
Yes.
This ruling applies for the following periods
Year ended 30 June 2017
The scheme commenced on
1 July 2016
Relevant facts and circumstances
You and your spouse own an investment property A as tenants in common. Your ownership interest is X% and your spouse's ownership interest is Y%.
You are the sole owner of two other investment properties B and C.
All these properties are rented out and earn assessable income.
You intend to obtain an equity loan/line of credit to service your deductible investment property expenses, such as: council rates, body corporate levies, water rates, insurance and interest.
You will be paying any interest accrued on the equity loan/line of credit when due with your own cash.
Your reason for obtaining the equity loan/line of credit is so you can preserve cash for your personal security.
The equity loan/line of credit will only be used for investment purposes.
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.
A number of significant court decisions have determined that for an expense to be an allowable deduction:
● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's case));
● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47); and
● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).
Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith (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 have investment properties from which you derive income. You intend obtaining an equity loan/line of credit which will only be used to pay deductible expenses incurred for these properties.
Therefore, you will be entitled to claim a deduction for the interest expenses incurred on your equity loan/line of credit under section 8-1 of the Income Tax Assessment Act 1997.
Apportionment
As you own 99% of property A you are entitled to a deduction of 99% of the interest expenses of the loan/line of credit incurred for the payment of the deductible expenses of this property.
As you own 100% of properties B and C you are entitled to a deduction of 100% of the interest expenses of the loan/line of credit incurred for the payment of the deductible expenses of these properties.