Private ruling: Interest
Published: September 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Where you use the equity in an investment property to procure a loan for another investment property, is the interest on the new amount attributable to the original property? | A1: No. | Q2: Where you use the equity in an investment property to procure a loan for another investment property, is the interest on that loan deductible for the period that the second property is rented or available for rent? | A2: 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 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 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. Taxation Determination TD 93/13 Income tax: is interest paid on a loan used to acquire income producing property an allowable deduction where non income producing property (e.g. the family home) is used as security for the loan? considers the deductibility of interest on a loan used to acquire an income producing property where a non-income producing property is used as security for the loan. This determination provides that the deductibility of interest is determined by the use of the money and not by the security given for the borrowed money. You originally took out a loan to purchase a rental property. You are considering either extending the loan or taking on another loan and using the equity in the investment property as security for the loan. A loan based on the equity in the investment property is not automatically deductible. As stated above, it is the use to which the funds are put that is relevant. Therefore, any additional loan will not be for the original property unless the funds are actually used for that purpose. Where you use the funds to purchase an investment property, the funds will be deductible against that property for the period that the property is rented or available for rent. Consequently, if either property becomes your residential home, the interest on the loan or loans used to purchase that property ceases to be deductible.

Relevant facts: You have a loan over an investment property. | You wish to use the equity in the property to procure a loan for another property. | The second property will initially be rented out but at a later date may become your residential home.