Private ruling: Interest deductions
Date of advice: 15 September 2022
Published: December 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim a deduction for interest expenses on the loan secured over your main residence property? | A1: Yes. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings 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. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. For a deduction to be allowed, it must be determined that there is a sufficient nexus between the interest expense and the activities which produce income. The interest expenses associated with the loan connected to your main residence property are an allowable deduction as the money originally borrowed was used for an income producing purpose and it is considered there is still a nexus between the interest expenses you still incur and the assessable income you derive from the shares.

Relevant facts and circumstances: You took out a loan over your main residence property to fund the construction of your investment property. You also took out a loan over the investment property. The loans were secured with mortgages over the respective properties. You secured a tenant for your investment property. Approximately 12 months later the tenancy ended. Approximately 4 months after the tenancy ended the investment property was sold. When the investment property was sold, you used the proceeds to discharge the loan over the investment property and pay the expenses associated with the sale of the property. The loan over your main residence property was not repaid. The remaining proceeds were used to acquire shares over a period of time. The shares purchased produce assessable income. You incur interest expenses in relation to the loan over your main residence property.

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