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Edited version of private advice
Authorisation Number: 1051923639573
Date of advice: 19 November 2021
Ruling
Subject: Rental deductions for interest and the use of offset facilities
Question
Are you entitled to deduct from your assessable income the interest incurred on your owner-occupied home loan as a result of transferring funds from your home loan linked offset account to your investment property loan linked offset account?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You have an owner-occupied home loan with a linked offset account.
You have an investment property loan with a linked offset account.
The interest charged on your investment property loan is higher than that on your owner-occupied home loan.
To save on your interest costs you are considering transferring funds from your home loan linked offset account to your investment property loan linked offset account.
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 any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, except where the outgoings are of a capital, private or domestic nature.
The deductibility of interest depends on the use of the borrowed funds that the interest is being charged on (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). If the borrowed funds were used for an income producing purpose, then the interest charged on those borrowed funds will be deductible.
If you transfer funds from your home loan linked offset account to your investment property loan linked offset account, the resulting interest that you will incur is not charged on the funds that you transfer. Rather the interest will be charged on the borrowed funds from your home loan.
It may appear that the bank is charging interest on the funds transferred but that is not the case. It appears that way because the interest on the borrowed funds from the home loan will no longer be reduced because the funds in the offset account have been withdrawn. However, the fact remains that the interest charged is on the borrowed funds from the home loan, not on the funds that have been transferred out of the offset account.
As the borrowed funds on which the interest will be charged were used to acquire your home rather than for an income producing purpose, the interest will not be deductible. This interest is not considered to be incurred in earning assessable income. Also, the interest is private in nature.