Private ruling: Rental deduction – interest joint loan
Date of advice: 7 November 2018
Published: February 2019
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2017

Ruling: Q1: Can you claim the total amount of interest expense you incur on the loan you and your spouse have on an investment property where only your name appears as the owner of the property on the title deed? | A1: Yes. Taxation Ruling TR 93/32 Income Tax: rental property – division of net income or loss between co-owners (TR 93/32) says that the income from a rental property is shared according to the legal interests of the owners except in very limited circumstances (paragraph 6). Paragraph 41 of TR 93/32 relevantly provides that we will assume that where taxpayers are related that the equitable right is exactly the same as the legal title. Therefore it is considered that you have the sole legal interest in the rental property and are required to declare any income or loss generated by the property. An interest expense will be deductible where it is incurred in gaining or producing assessable income. The character of a new loan which refinances a previous loan follows from that previous loan. In your case it is considered the other party to the loan has acted as a nominee or agent for the other in order to satisfy the requirements of the lender. Additionally you and your spouse came to an agreement where he on-lent you the funds on the condition you repay the principal fees and interest as per the conditions of the bank loan. You can claim all of the interest incurred in relation to the loan for the investment property under section 8-1 of the Income Tax assessment Act 1997 .

Relevant facts and circumstances: You are the sole owner of a residential investment property. You have a loan for the property that was taken out by you and your spouse. The bank required your spouse to be on the loan to prove the serviceability of the loan. Since your acquisition of the property you have claimed 50% of the interest expense on the loan as you thought you were only entitled to half due to the loan being a joint loan and after receiving advice from a friend. All of the income from the rental property is attributed solely to you. You have refinanced your original loan on the property at least twice. The original loan and subsequent refinancing have only ever been for the original investment property. When you refinanced the loan with the current lender they required you to open an offset account in your and your spouse’s names. The loan repayments come from the account you hold jointly with your spouse, but you consider it to be out of the funds you receive from the rent. The other rental expenses you incur come out of the same account. At the time of the loan you did not enter into an onward loan agreement. Recently you were told that your spouse could on-loan their half of the loan to you. You and your spouse entered into an onward loan agreement whereby your spouse agreed to provide an onward loan to you being for the amounts loaned with a previous lender.

Relevant legislative provisions: Income Tax assessment Act 1997 section 8-1