Private ruling: Interest expense
Date of advice: 30 March 2016
Published: May 2016
Ruling period: Year ended 30 June 2016. | Year ended 30 June 2017.
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to claim a deduction for interest on a loan used to purchase an investment property from your spouse? | A1: Yes.

Relevant facts and circumstances: Your spouse is the sole owner of an investment property. You will purchase the investment property from your spouse at market rate. You will be the sole owner on the title deed and will borrow the funds in your name only. The property will be rented to a third party at market rate.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature. Taxation Ruling TR 95/25 provides that the deductibility of interest is determined by the use for which the borrowed money is intended. The use test looks to the application of the borrowed funds as the main criteria (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153). Where borrowed funds are used for investment purposes such as the acquisition of a rental property, the interest will be deductible to the extent that the property is used to produce assessable income. In your case, you will be incurring interest on a loan which you will obtain to acquire an investment property. The property is being purchased at market value in an arms-length transaction. As the borrowed funds are being used for income producing purposes, the associated interest expenses are an allowable deduction. The fact that you are purchasing the property from your spouse does not change the deductibility of the expense in your specific circumstances. The interest expenses incurred are an allowable deduction under section 8-1 of the ITAA 1997.