Private ruling: Interest deductibility - redraw facility
Date of advice: 3 March 2026
Published: 4 May 2026
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Under the circumstances, will the Commissioner permit the Trust to disregard the client's administrative error - being the temporary deposit and withdrawal of personal funds from the loan account - and continue to claim a full 100% deduction for interest incurred under section 8-1 of the ITAA 1997? | A1: No.

Relevant facts and circumstances: You owned a commercial property. The property was leased for use by one of the beneficiaries to operate a business from 20XX. The mortgage on the property was originally $X in 20XX. It was paid down to $Y and has remained constant with periodic renewals over X year terms. The business renting the commercial property was sold in XXX 20XX but you continued to lease the property to the new business operators. The proceeds from the sale of the business were $X which was received on X XXX 20XX. The proceeds were allocated, upon receipt to the following: • $Y into a personal account • $Y to pay off a motor vehicle The balance of the proceeds was allocated to you to hold and the intention was to utilise the funds to purchase a retirement villa for a beneficiary for $X. The balance of the proceeds was paid into the mortgage account by your solicitor rather than a line of credit or term deposit. The proceeds received from the sale of the business were not intended to be used to repay the mortgage. An amount was 'redrawn' from the mortgage account on X August 20XX to purchase the retirement unit. The unit is not used for any income producing purpose.

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 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith 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. Taxation Ruling 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities considers the deductibility of interest incurred by borrowers on money drawn down under line of credit facilities and loans offering redraw facilities. Paragraph 43 of TR 2000/2 states that the Commissioner considers a redraw from a loan account to be a separate borrowing. Therefore, the deductibility of the interest on that separate borrowing depends on whether the interest is incurred in gaining or producing assessable income regardless of the original purpose of the funds. If this is for a non-income producing purpose, then the interest on the redraw amount is not deductible. The redraw facilities referred to in Taxation Ruling TR 2000/2 is where a borrower redraws previous repayments of the loan principal in a loan account. | Detailed Reasoning - Application to your circumstances: You had a mortgage related to a commercial property which was used to derive rental income. Upon the sale of a business an amount was transferred into the mortgage account which reduced the balance of the loan. Funds were then withdrawn from the mortgage to purchase a retirement unit for a beneficiary. The retirement unit is not used for any income producing purpose. Whilst the loan may have been reduced in error, having regard to all your circumstances, and based on the principles outlined in TR 2000/2, we do not consider that the redrawn funds were used for the purpose of gaining or producing assessable income. Therefore, you are not entitled to a deduction for 100% of the interest incurred on the mortgage under section 8-1 of the ITAA 1997.