Private ruling: Interest expenses
Published: December 2011
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction under 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for all the interest you incur on your loans referable to your rental property? | A3: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You own a property you use as your principal place of residence (your home). You will acquire a rental property which will be an approved rental dwelling under NRAS and participate in NRAS via a non-entity joint venture with Queensland Affordable Housing Consortium Limited (an NRAS approved participant). NRAS is a Commonwealth Government scheme designed to encourage large-scale investment in affordable housing by offering tax and cash incentives to providers of new rental dwellings. Entitlement to these incentives is subject to certain conditions being met by you, including that your rental property is rented to eligible tenants at an amount of at least 20% below market rates. The NRAS incentives offered to you are annual incentives, comprising of: § a Commonwealth Government incentive made by way of a refundable tax (Division 380 of the Income Tax Assessment Act 1997 (ITAA 1997) § a cash payment from the relevant state government, which is NANE income (section 380-35 of the ITAA 1997). You will fund the acquisition of your rental property by obtaining borrowings from a lender. You will incur interest on the borrowings referable to your rental property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Division 380 | Income Tax Assessment Act 1997 Section 380-35

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Interest expenses: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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. However sub-section 8-1(2) of the ITAA 1997 states you cannot deduct a loss where the outgoings are of a capital, private or domestic nature, or incurred in producing NANE income. 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. The security provided as a surety against such a borrowing is not relevant for the purposes of determining the use of that borrowing: TD 93/13. 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: Taxation Ruling TR 95/25 Compound (or capitalised) interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27. Apportionment of expenditure is necessary where it serves both an assessable income producing end and some other end: ( Ronpibon Tin NL v FC of T (1949) 8 ATD 431). In your situation, while derivation of assessable income by way of rent is one objective achieved by your participation in NRAS, the receipt of government incentives, including state government NANE income is another. The costs associated with making your property available as an NRAS rental property would need to be apportioned to reflect the derivation of associated assessable income and NANE income. Accordingly the interest you will incur in respect of the rental property must be apportioned, limiting your claim for any deduction to the portion of costs relating to the derivation of assessable income. | Detailed Reasoning - Additional information: Generally this apportionment of expenses would be made using the following formula to calculate the percentage of deductible expenses: A x B B-C A = Otherwise deductible expenses B = assessable rental income derived from the property C = NANE income associated with the property (state government incentive) | Detailed Reasoning - Rental income: A private ruling provides the Commissioner's view on how a relevant provision applies to a defined arrangement. You have asked if you may direct all rental income to your home loan, however this question is not in respect of a relevant provision. Accordingly the question is not a valid question and the Commissioner may not make a ruling in this regard. | Detailed Reasoning - Part IVA: The Commissioner may decline to make the ruling in certain situations, including circumstances where the making of the ruling would prejudice or unduly restrict the administration of a taxation law: subsection 359-35(2) of Schedule 1 to the Taxation Administration Act 1953 (TAA). Taxation Ruling TR 2006/11 provides examples of these circumstances which include where: making the private ruling would require an unreasonable diversion of the Commissioner's resources from other matters to which the Commissioner must attend in the course of administering the taxation laws. The power to decline to rule in such situations recognises that the Tax Office is not in the business of giving advice as a purely academic exercise, or allowing some entities to divert the Tax Office's resources to meet their needs to the detriment of others and the robustness of the system as a whole. Accordingly, the Commissioner will not make a ruling in this instance. Because you are not entitled to a deduction for all the interest incurred on your loans referable to your rental property under section 8-1 of the ITAA 1997, we consider it likely you will not enter the arrangement, or will make structural changes to the arrangement prior to entering it. Therefore it would also be an unreasonable diversion of resources to make a ruling on the application of Part IVA in this instance. A decision to decline to make a ruling is reviewable under the Administrative Decisions (Judicial Review) Act 1977 . For further information about your review rights, please read the explanatory notes attached to this letter.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Are you able to apply the rent from your rental property against the loan for your principal place of residence? | Answer: This is not a valid question as it is not in respect of a relevant provision. | Are you entitled to a deduction under 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for all the interest you incur on your loan used to acquire your rental property? | Answer: The Commissioner declines to rule on this matter.