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Edited version of your written advice
Authorisation Number: 1051300341098
Date of advice: 30 October 2017
Ruling
Subject: Loan interest deduction
Question 1
Are you entitled to a deduction for the interest expenses you have paid on your loan accounts being used only for your rental property?
Answer
Yes
Question 2
Are you entitled to a deduction for the interest expenses you have saved and not had to pay by having an offset account?
Answer
No
This ruling applies for the following periods
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
The scheme commenced on
1 July 2016
Relevant facts
You are the sole owner of a rental property.
The loan for the property is split, with the major portion at a fixed rate of interest.
The remainder is in a variable rate loan with an offset facility.
Your loan documentation statements detail the actual interest paid for the individual accounts, as well as the additional interest that would have been paid if you did not have the offset account.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Interest expenses
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 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 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. However, where a loan relates to private purpose, no deduction is allowed.
As your loan account is being used only for your investment property expenses, the associated interest incurred is an allowable deduction.
Taxation Ruling TR 93/6, discusses loan account offset arrangements and at paragraph 17 states that “the deduction allowable to the customer for the interest cannot exceed the reduced amount of interest actually incurred by the customer”.
Therefore, you may claim a deduction only for the interest that you actually pay.