Private ruling: interest expenses
Published: August 2013
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for your share of the interest expenses incurred on your refinanced loans when all properties are used for income producing purposes? | A1: Yes.


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. Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. Further, interest on a new loan used to repay an existing investment loan will generally also be deductible as the character of the new loan is derived from the original borrowing. That is, when a loan is refinanced, the new loan takes on the same character as the previous loan. Refinancing a loan does not in itself break the nexus between the outgoings of interest under a loan and the income earning activities. In your case, you have three loans for your three rental properties. You intend to refinance the three loans and change the balance of each loan. When you refinance your loans, the borrowed funds are still being used for income producing purposes. Accordingly, you will still be entitled to a deduction for interest incurred on funds used for investment purposes when you refinance your loans.

Relevant facts: You and your spouse have equal shares in investment properties which are all rented out at commercial rates. | You have loans for the properties. Each loan is in joint names. | You wish to reduce the loan balance of loan one using the equity from loan two and loan three. As a result the loan balance of loan two and three will increase. | The amount of your interest expenses will be the same. | You wish to change the loans from variable to having loan two and three as fixed and keep loan one as variable.