Private ruling: Rental Interest Deductions
Date of advice: 5 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the interest incurred on your investment property loan be deductible in whole? | A1: Yes.

Relevant facts and circumstances: In mid 20XX you purchased an investment property (the property). In order to purchase the property you redrew funds from your main residence home loan account. You did this instead of getting a deposit bond as you had sufficient funds to redraw. You got a loan to cover the entire price of the property. You are now intending to use funds from the investment loan to repay the money redrawn from the main residence home loan to pay for the deposit and stamp duty of the investment property.

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) 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. Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. Further, interest on a new loan used to repay an existing investment loan will generally also be deductible as the character of the new loan is derived from the original borrowing. Taxation Ruling TR 2000/2 contains the Commissioner's view on the deductibility of interest with regards to line of credit and redraw facilities. We consider draw-down from a line of credit account or sub account, or a redraw from a loan account, is a separate borrowing. To the extent borrowings are used for income producing purposes, that part of the accrued interest attributable to those borrowings is deductible. Conversely, that part of the accrued interest attributable to borrowings for non-income producing purposes is not deductible. Taxation Ruling TR 95/25 states that interest on a new loan used to repay an existing loan will generally also be deductible as the character of the new loan is derived from the original borrowing. In your case, you redrew from your main residence loan to pay the deposit and stamp duty on an investment property. You are now intending to use money from your investment loan to repay the redrawn amount. It is accepted this is in effect a simple refinance and the new borrowing retains the character of the original borrowing. As the interest on the portion of the original redrawn funds from your main residence loan would be deductible, as it was used for an income producing purpose, by repaying the redrawn amount from the investment property loan you are merely shifting the amount of deductible interest from one loan to the other. Accordingly you are entitled to a deduction for the entire interest you incur on your investment property loan.