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Edited version of your written advice
Authorisation Number: 7920129145206
Date of advice: 18 January 2019
Subject: Rental deductions for interest and the use of an offset facility attached to a deposit account
Question 1
Are you entitled to a deduction for the full amount of the interest you incur on a loan used to acquire an investment property where you withdraw funds from your offset account for non-income producing purposes?
Answer
Yes
This ruling applies for the following periods:
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
Year ending 30 June 2022
The scheme commences on:
1 July 2018
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 have loan accounts that are used to assist with the purchase of a property used for rental purposes.
You have loan account offset arrangements for the loan. These consist of a mortgage account and a mortgage offset account.
No interest is received on the mortgage offset account. However the interest is payable, only on the net account balance, that is the balance of the mortgage account less the balance of the mortgage offset account.
Your mortgage account balance relate solely to your investment property.
You may withdraw amounts from the mortgage offset account for a non-income producing purpose.
Loan settlement date and funding date occurred during the 2019 financial year
A single loan was fully funded for the purchase of the investment property
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Taxation 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.
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, the interest on this borrowing is considered to be incurred in the course of producing assessable income. With regards to borrowings relating to property, the interest will be deductible to the extent that the property is used to produce assessable income.
Taxation Ruling TR 93/6 Income tax and fringe benefits tax: loan account offset arrangements, outlines the Commissioner's view on 'interest offset arrangements' which are used to reduce the interest payable on a taxpayer's loan account. TR 93/6 provides that an acceptable loan account offset arrangement with dual accounts operates as follows:
● There are two accounts a loan account and a deposit account. It is accepted that where the deposit account is a sub-account, it will be treated as a separate account.
● No interest is received on the deposit account.
● The interest on your loan can only be reduced to the extent of the amount of interest which would have been charged on the loan amount equal to the balance of your deposit account. For example, you have a loan of $250,000 and a credit balance in your deposit account of $50,000. You can only obtain a maximum reduction of interest as if the balance of your loan was $200,000 (reduced by the $50,000 balance of your deposit account).
A taxpayer with an acceptable loan account offset arrangement with dual accounts is entitled to claim a deduction for the full amount of interest incurred on the loan account whilst the loan is used wholly for income producing purposes.
This will remain the case even if funds are withdrawn from the deposit account and used for non-income producing purposes. Depositing funds into the deposit account will decrease the interest payable on the loan account but will not decrease the balance of the loan account. Withdrawing funds from the deposit account will increase the interest payable on the loan account but will not increase the balance of the loan account.
In your case you have a loan fully funded for the purchase of an investment property that is used wholly for income producing purposes. Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the full amount of the interest incurred on that loan regardless of whether amounts are withdrawn from your offset accounts for personal use.