Private ruling: Deduction for loan interest after rental property was sold
Date of advice: 2 November 2018
Published: January 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for the interest on the remainder of an investment loan after one of the properties financed was sold? | A1: Yes The Commissioner’s view on whether interest deductions are allowable after the cessation of the relevant income producing activity is outlined in Taxation Ruling TR 2004/4. Although cases referred to in TR2004/4 relate to business activities, the loan was kept on foot for the purpose of repaying the loan on the former income producing property, and most of the funds from the sale of the property were applied against the loan. In your case, the funds from the sale of the property that you applied to the combined loan were insufficient to pay out the loan in its entirety. Therefore, the loan was kept on foot for reasons directly related to the income earning activities and the nexus between the interest expense and the relevant income earning activity has not been broken. As a result, the interest expense is an allowable deduction under section 8-1 of the ITAA 1997. Interest on the combined loan will remain deductible as long as the nexus between the interest expense and the relevant income producing activity is not broken.

Relevant facts and circumstances: You are the part owner of two rental properties. One property was strata titled soon after settlement to maximise returns. Due to financial pressure, one of your properties was sold at a loss. From the property sale price, most was used to repay the loan, which was not sufficient to cover the original loan amount. This means that you have a loan greater than the original acquisition cost of the properties. The loans are on an interest only basis. The borrowings were only used to purchase the properties, and are interest only loans. The properties have been rented through a real estate agent or property manager at commercial rates for the full period of ownership. You and your co-owner have claimed rental property deductions and declared the rental income in the same proportion as your respective legal titles. At present, the loan is above the original acquisition price of the remaining properties.

Relevant legislative provisions: Income tax Assessment Act 1997 section 8-1