Private ruling: Deductibility of interest
Published: September 2011
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Question and answers: | Are you entitled to deduct the interest expenses that you will incur on a loan for an investment property purchased from your spouse? | Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 8-1.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital, private or domestic in nature or relates to the earning of exempt income. 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, provide the Commissioners view regarding the deductibility of interest. The use test is the basic test relied upon to establish the deductibility of interest and looks at the application of the borrowed funds as the main criterion. Accordingly, where borrowed funds are used for income producing purposes the interest on those funds is deductible. In your case, you intend to take out an interest only loan with the view of purchasing your spouse's investment property. The funds from the loan will be used exclusively for the purchase of the investment property and the investment property will continue to be used for the purpose of producing assessable income. Accordingly, you are entitled to a deduction for the interest expense that you will incur, under section 8-1 of the ITAA 1997.

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. | Relevant facts: Your spouse owns an investment property. | You intend to purchase the investment property from your spouse at market value. | You intend to obtain an interest only loan from a bank to finance the purchase of the investment property. | All funds from the loan will be exclusively used for the purchase of the investment property. | The investment property is currently and will continue to be leased out at arms length through a real estate agent.