Private ruling: Interest deduction and investment loan offset account
Published: March 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Can you claim a deduction for interest charged on a loan by a family member to deposit into your rental property offset account? | A1: Yes.

Relevant facts and circumstances: You have purchased a rental property through a fully variable investment loan containing an offset facility. You do not currently have money in the offset account. Your financial institution currently charges you greater than X% in interest. However it is a variable interest rate which can change at any time. You are interested in borrowing funds from a family member to deposit into your investment loan offset account, at the interest rate of less than X% per annum. The money will not be lent to you for any particular period of time, and the family member can request the money to be returned at any time. You consider the arrangement to be beneficial to both yourself and the family member, as the interest rate charged by your family member is less than your mortgage interest rate, and the interest paid to the family member is greater than the interest a financial institution would pay them for the same funds. There is no formal contract between you and your family member, as it is a casual arrangement.

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, or relate to the earning of exempt income. Taxation Ruling TR 95/25 deals with deductions for interest under section 8-1 of the ITAA 1997. Interest is deductible where the expense has a sufficient connection with the gaining or producing of assessable income and it is not of a capital, private or domestic nature. To establish that there is a sufficient connection between incurring an interest expense and the gaining or producing of assessable income, regard must be given to all the circumstances including the use to which the borrowed funds are put. 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. The interest incurred will be deductible to the extent that the property is used to produce assessable income (or benefit) greater than or equal to the amount of the outgoing. In determining the deductibility of interest, the courts and tribunals have looked at the use to which the borrowed moneys have been put. | Detailed Reasoning - Deposit to offset account: Where you have deposited borrowed funds to your rental property loan offset account, it is necessary to examine whether the arrangement produces an amount of assessable income or benefit greater than or equal to the interest incurred on the loan from which the funds were sourced. In your case, the interest rate of the family member investment loan is less than the interest rate of the rental property loan. Therefore the benefit from depositing the funds to the rental property loan offset account (reduced interest payable on the rental property loan) is greater than the interest expense incurred on the loan from your family member. Therefore you are entitled to a deduction for the interest incurred on the loan from your family member, based on your percentage of ownership in the rental property.

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