Private ruling: interest expenses
Published: October 2011
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for all the interest you incur on your rental loan sub-account? | A2: 

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 principal place of residence (your home). You own a property you use as a rental property (your rental property). You have a 'split loan' facility. You have two sub-accounts under this facility. The first sub-account is in respect of your home (your private sub-account). The second sub-account is in respect of a rental property (your rental sub-account). You have an account which is an acceptable offset arrangement against your private sub-account (your offset account). You will draw a further borrowing from your rental sub-account and credit these funds to your offset account. This has the effect of reducing the interest incurred on your private sub-account by way of the offset account. You will incur additional interest on your rental sub-account in respect of these funds. You will transfer these funds back to your rental sub-account as required. You will direct the rental income from your rental property to the private sub-account.

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

Reasons for decision: Summary: Interest expenses 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. Where a borrowing is used for both private and income earning purposes, it is necessary to apportion the interest incurred on this borrowing to exclude the portion of interest referable to the private purpose. In your situation, it is accepted a portion of the interest on your rental sub-account is referable to your rental property and is therefore incurred in the production of your assessable income. However a portion of this sub-account will be drawn in order to reduce the interest incurred on your private sub-account, which is a private purpose. Accordingly you are entitled to a deduction under section 8-1 of the ITAA 1997 only for the interest you incur on the rental sub-account which is referable to your rental property. You are not entitled to a deduction for the interest incurred on the portion drawn and credited to your offset account as the interest on these borrowings are considered private in nature and not incurred in producing your assessable income. Rental income A private ruling provides the Commissioner's view on how a relevant provision applies to a defined arrangement. You have asked if there is any problem with directing all rental income to your private sub-account, however this question is not in respect of a relevant provision. Accordingly the question is not a valid question and the Commissioner will not make a ruling in this regard.

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. | Are you able to direct your rental income to your private sub-account? | Answer: This is not a valid question as it is not in respect of a relevant provision.