Private ruling: Deductions - interest expenses
Date of advice: 5 September 2025
Published: 27 October 2025
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim a full interest deduction under section 8-1 of the Income Tax Assessment Act 1997 for the interest you incurred on an investment property loan? | A1: Yes.

Relevant facts and circumstances: In XX 20XX, you purchased a property (the property). Settlement occurred on XX/XX/20XX. The purchase price for the property was approximately $X. You entered into a loan agreement for $X (Investment Loan) with a Bank to assist with the finance of the property. At the same time that you commenced the Investment Loan you commenced an off-set account. Your salary is deposited into the off-set account. You pay for rates, levies and other living expenses from the off-set account. The property has been leased out from the time that you acquired it. You have never lived in the property as your main residence. You have been reporting the rental income and claiming deductions in the relevant income years that they have been incurred or received. You have been claiming the interest on the loan account in each income year that you have incurred the expenses. On XX/XX/20XX, you transferred an amount of $X from the off-set account into the Investment Loan account. You provided bank statements showing the transactions between both accounts. Within the period of approximately two years, you transferred an amount of $x, less than the original amount, from the Investment Loan account into the off-set account. You provided bank statements showing the transactions between both accounts.

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, or relate to the earning of exempt income. Expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction. Interest on loan used to purchase a property which is rented or available for rent is an allowable deduction under section 8-1 of the ITAA 1997. 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 that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. The use test, established in FC of T v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest and looks at the application of the borrowed funds as the main criterion. 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. Where a loan is used for investment purposes from which income is derived, the interest incurred on the loan will generally be deductible. For an expense to be allowed under section 8-1 of the ITAA 1997, the expense must be incurred. Paragraphs 9 to 40 of Taxation Ruling TR 2020/1 Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997 consider the following elements of the section 8-1 positive test, that: • the expense must be incurred • it must be incurred in gaining or producing assessable income which • involves consideration of all the facts and circumstances of the expense and its connection to income-earning activities • means in the course of gaining or producing assessable income, and • requires a proper understanding of the relevance of employer requirements, and • an amount is only deductible to the extent incurred in gaining or producing assessable income. Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's views on the meaning of incurred. The ruling outlines rules, settled by case law, which assists in defining when an outgoing is incurred. Paragraph 3 states to qualify for deduction under section 8-1 a loss or outgoing must have been incurred. Paragraph 6 states as follows: (e) in the case of a payment made in the absence of a presently existing liability (where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid; (f) while the above principles may be applied to both losses and outgoings, the distinct nature of losses must be considered. A loss must be definitively encountered, run into, or fallen upon by the taxpayer. For a loss to be incurred it must be realised and more than impending, threatened or expected. A taxpayer will not have incurred a loss if some contingency means that they are not 'definitively committed' or 'completely subjected' to it. In your case, you have a bank loan (Investment Loan account) which is only used in relation to a property which you have leased out since you acquired it in XX 20XX. You have been reporting the income and claiming the interest expenses that you incur on the loan in the relevant income that they are incurred. On XX/XX/20XX you transferred an amount of $x into the Investment Loan account from your off-set account. You stated that the transfer was a human error. On XX/XX/20XX, you transferred an amount of $x from the Investment Loan account into the off-set account. You stated that you were busy with personal activities, therefore you didn't do the transfer any earlier. You also stated that the amount was different from the original amount as you were scammed between the period of XX 20XX to XX 20XX and the bank only reimbursed you for $x. Although we appreciate that you may have intended to relieve some financial pressures, a deduction is only allowable on an expense that has been incurred in the course of gaining or producing assessable income. Therefore, a deduction is only allowable for the interest that you incurred on the Investment Loan account for the financial year that you incurred the expense. As a payment was made to the Investment Loan account the interest incurred will be reflective of the balance in the Investment Loan account as reported by your bank.