Edited version of private advice

Authorisation Number: 1051936449818

Date of advice: 22 December 2021

Ruling

Subject: Rental - deductions

Question

Are you entitled to claim a deduction for the associated interest expense incurred on the loan for your investment property after the property was sold?

Answer

Yes. Your circumstances meet the criteria set out in TR 95/25 and TR 2004/4. There is a sufficient connection between the interest expense and your prior income producing activities. Your interest expenses are deductible as per section 8-1 of Income Tax Assessment Act 1997.

You have not kept the loan on foot for reasons associated with your former income earning activities, and you have not made a conscious decision to extend the loan in a way there is a commercial advantage to be derived that is not related to the original income earning debt.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased an investment property in 20XX. It is known as a bed and breakfast.

You purchased the property for $XX inclusive of all charges. You have sole ownership of the property.

Two loans were taken out for the initial purchase and set up of the bed and breakfast. Loan A and Loan B.

Loan A was a fixed rate loan at XX% and your borrowed $XX on 20XX.

Loan B was a variable rate loan and you borrowed $XX on 20XX.

Both loans are in the names of two co-borrowers, you, and your spouse.

Loan A has been refinanced once to switch from a fixed to a variable rate.

Both loans have not had any funds re-drawn for a private purpose since they were established.

You have claimed all the investment income and expenses in your income tax returns.

On 20XX, you sold the property for $XX after settlement costs. You made a capital loss of $XX.

You used the funds from the sale of the property to contribute to your loans. You had insufficient funds to pay off both loans from the sale proceeds.

Loan A was discharged on 6 April 20XX.

You are still making repayments for Loan B. The shortfall amount is $XX as of 20XX.

You have no intentions to use Loan B to fund anything else.

You do not have any intentions to extend the Loan B. Your only intention is to pay out the loan.

The property was first made genuinely available for rent in 20XX.

The property has always been genuinely available for rent until it was sold. The property has had no private use.

Other Information

The Commissioner does not rule for indefinite or extended periods as there may be changes to the facts of the arrangement or the law in question. Also, a public ruling may issue which affects the private ruling.

We have issued a ruling for a five year period. If your circumstances have not materially changed after the ruling period, you may apply for another private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1