Private ruling: Compound interest
Ruling period: Income year ended 30 June 2012 | Income year ended 30 June 2013 | Income year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the interest you incur on your rental loan where you allow the interest to charge to the loan without payment? | A1: 

Relevant facts and circumstances: You currently operate a rental property and claim a deduction for the interest you incur on your rental loans in respect of the rental property. You will allow the interest incurred on some of the rental loans to capitalise (charge to the rental loans without repayment).

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 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. Whether interest has been incurred in the course of producing assessable income generally depends on the purpose or use to which the borrowed funds have been put. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. Compound (or capitalised) interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27. Where you allow interest incurred on your rental loan to simply charge to the loan without repayment, the interest is compounding. Accordingly you are entitled to a deduction for the interest you incur as its character follows that of the original borrowing, which is in respect of earning assessable income.

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