Private ruling: interest expenses
Published: October 2011
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the interest you incur on your line of credit? | A1: 

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 own a property you use as your principle place of residence (your home). You have a loan referable to this property (your home loan). You own a property you use as a rental property (your rental property). You have an interest only loan referable to the purchase of this property (your rental loan). You have a line of credit which you use for the following purposes: · to fund 20% of the purchase price of your rental property plus incidental costs in respect of the property purchase · to purchase income producing shares/managed funds · to meet the repayments on your rental loan · to meet deductible rental property expenses, including rates, insurance and maintenance. You will direct the rental income from your rental property to repay your home loan.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put. Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income: Taxation Ruling TR 95/25 Compound (or capitalised) interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27. In your situation, it is accepted the interest on your line of credit is referable to your rental property and income earning investments and therefore incurred in the production of your assessable income. Accordingly you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest you incur on this borrowing.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.