Private ruling: Interest deductions
Published: January 2012
Ruling period: Year ending 20 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for interest on a loan you will be taking out to acquire your spouse's share of the property? | A1: Yes.


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 put. 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 the other half share in a property that will be rented out on an arms length basis. The half share in the property is being purchased at market value. 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 half share in the property from your spouse does not change the deductibility of the expense in your circumstances. The interest expenses incurred are an allowable deduction under section 8-1 of the ITAA 1997.

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. | Relevant facts: You own a residential property jointly with your spouse. | This property has been used for private purposes. | You now wish to buy out your spouse's share of the property and use it as a rental property, on an arms length basis. | You will take out an additional loan of 50% of the market value of the property, based on a sworn valuation.