Private ruling: The deductibility of interest from home offset account.
Published: September 2013
Ruling period: § Year ended 30 June 2011 | § Year ended 30 June 2012 | § Year ended 30 June 2013
Date scheme commenced: 1 July 2010

Ruling: Q1: Can you claim a deduction for the increased interest on your home loan, when you withdraw funds from an offset account attached to your home loan? | A1: No.

Relevant facts and circumstances: You have a home loan used to purchase your private residence. You also have a home loan offset account attached to the loan. The balance of the offset account reduces the principal amount of the loan when calculating the interest payable on the loan. You withdrew funds from your home loan offset account to purchase income producing shares.

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 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. Interest incurred on money borrowed to purchase income producing investments such as shares is an allowable deduction. However, interest incurred on money borrowed for a private purpose is not deductible. In your case, you have a home loan that has an offset account attached. You can deposit and withdraw money from the offset account for day to day transactions. The interest incurred on the home loan is reduced based on the balance of the offset account. Withdrawing money from the offset account increases the interest on the home loan, and does not change the character of that money from savings to borrowings. Section 995-1 of the ITAA 1997 provides the definition of borrowing. Borrowing means any borrowing, whether secured or unsecured, and includes the raising of funds by the use of a bond, debenture, discounted security or other document evidencing indebtedness. The money withdrawn from the offset account is not in the form of borrowings and will not incur any interest. The amount withdrawn is reflected as a reduction in your savings. Consequently, any use to which these funds are put (including an income producing purpose) is funded by your savings and not new borrowings (indebtedness). All the interest payable on the home loan account will still relate to the private purpose of purchasing your home. Therefore, the increased interest on your home loan, as a result of withdrawing funds from the offset account and using those funds for investment purposes, is not an allowable deduction under section 8-1 of the ITAA 1997. | Detailed Reasoning - Additional information:: As mentioned above, the only way interest can be deductible is if the funds used for purchasing the income producing asset are 'borrowed' by the use of a bond, debenture, discounted security or other document evidencing indebtedness, and interest was charged as a result of the borrowings. As the shares were purchased from savings, you cannot claim interest as none has been incurred by you.