Private ruling: Interest deductions
Published: February 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the interest and bank charges incurred on a reverse mortgage deductible against rental income for the property? | A1: No. | Q2: If you and your relative borrow money to pay out the reverse mortgage will the interest on the new loan be a deductible rental expense? | A2: No.

Relevant facts and circumstances: You and your relative inherited a house. The deceased had lived in the house and obtained a reverse mortgage on the property. The money was used for private purposes. Despite your attempts to change it, the mortgage is still in the name of the estate. You and your relative are now renting the property and are making repayments on the mortgage from your own funds. Interest has been charged on the mortgage in addition to bank fees.

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

Reasons for decision: Summary: Under section 8-1 of the Income Tax Assessment Act 1997 you can claim a deduction for expenses to the extent to which they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. No deduction is allowed for expenses to the extent to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income. Taxation Ruling TR 95/25 provides that the deductibility of interest is determined by the use for which borrowed money is intended. It is essentially a question of fact. Where borrowed funds are used for private purposes, such as the acquisition of a home, the interest will not be deductible even if there is a secondary result that other assets are able to be retained for the purpose of producing assessable income. In your case, the funds were obtained for private purposes. Therefore, whether the mortgage is in the name of the estate or you and your relative take out a loan to pay out the mortgage, the interest and bank fees will not be deductible.