Private ruling: Interest deduction
Published: April 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for all the interest incurred on the loan? | A1: Yes

Relevant facts and circumstances: You acquired a rental property, the purchase of which was funded by a loan held in your name solely. You intend to refinance this loan in order to reduce the costs of the borrowing through discount interest rates. Your lender requires the new loan to be held jointly with you and your spouse to be entitled to discount interest rates. The legal title for the rental property will remain in your name solely and there is no intention your spouse will obtain any ownership of the property. Your spouse has not and will not assert any ownership interest in the property and they require you to indemnify them for their liability and for you to meet any repayment obligations they have under the borrowing.

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 you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put. Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. The character of a new loan which refinances a previous loan follows from that previous loan: 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 . In your situation, it is accepted the interest is referable to the rental property and you are entitled to a deduction for the interest incurred on the loan.